Senate Banking Committee Chairman Chris Dodd launched a tough opening salvo Tuesday in the regulatory reform debate, unveiling legislation that would go well beyond other plans to redraw the financial services regulatory map.

The bill would strip the Federal Reserve of its supervisory responsibilities for bank holding companies and state member banks, returning it to an entity designed primarily to conduct monetary policy.

The Federal Deposit Insurance Corp. (FDIC), too, would lose its supervisory responsibilities, and serve solely as a deposit insurer and agency that handles resolutions. All bank supervision would be conducted by a new agency, the Financial Institutions Regulatory Administration (FIRA).

The bill sets the stage for several major battles. It goes much further than a bill by House Financial Services Committee Chairman Barney Frank, which would merge the Office of the Comptroller of the Currency and  Office of Thrift Supervision (OTS), and is likely to infuriate community bankers who fear a single regulator could destroy the dual banking system.

Similarly, large firms may oppose the creation of a new systemic risk regulator, the Financial Stability Agency, because it is explicitly allowed to break up large and complex banking organizations.

Additionally, the bill's new consumer financial protection agency would erode any form of federal preemption, allowing states to set and enforce tougher consumer protection standards against national and state banks.

Under the bill, the new banking regulator, FIRA, would be led by a five member board headed by an independent chairman who would be appointed by the president and confirmed by the Senate. The rest of the board would include a vice chairman representing state banking expertise, two independent directors, and the heads of the Fed and FDIC.

The bill explicitly says the new agency must seek to preserve the dual banking system and must establish a consolidated community bank division.

The consolidated agency is meant to circumvent charter shopping and improve accountability by having ultimate responsibility fall on the agency's head.

The bill would establish a systemic risk agency that would have rulewriting authority but no supervision power. It would include nine members, governed by an independent chair and include the heads of the Fed, Treasury, FDIC, FIRA, the consumer protection agency, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The council would be staffed by a group of economists, accountants, lawyers, former supervisors, and other specialists. It would have the power to break up systemically risky firms, force them to increase their capital, and limit their growth.

It would also require institutions to issue long-term hybrid debt securities to set up capital reserves to be tapped during an emergency.

The legislation would require large, complex companies to draft emergency plans should the company go insolvent. The plans would have to detail their orderly shutdown. Penalties for failing to provide “funeral plans” could include higher capital requirements, further restrictions on growth and activity, and forced divestment of risky activities.

The FDIC's resolution powers would be enhanced to target any systemically risky firm. The costs for their dismantling would come from assessments after the collapse on institutions with over $10 billion of assets.

Like Frank's approach, the consumer protection agency as Dodd has proposed would have broad rule-writing and enforcement powers for all financial providers including banks and non banks.
But Dodd's bill would focus resources on companies that pose the biggest risk to consumers including mortgage bankers, brokers, finance companies and the largest institutions. For mortgage securitizations, the Dodd bill would require originators retain 10% of the risk. Frank has included a similar provision in his bill.

The consumer agency would be led by a five-member board, including the chairman of FIRA and led by an independent director. Frank has opposed running the consumer agency with a council, saying it would weaken the agency's power.

Dodd was joined by seven other Banking Committee Democrats to discuss the legislation at a noon news conference, including Sen. Mark Warner of Virginia, who previously has raised concerns with a consumer protection agency, and Jon Tester of Montana, who frequently raises concerns from the community bank perspective.

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