Financial industry representatives are scrambling to find a strategy for responding to the massive regulatory reform bill the Senate Banking Committee aims to pass by early December.

The list of industry complaints about Chairman Chris Dodd's discussion draft is vast and growing as lawyers and analysts struggle to digest the bill and calculate its impact.

In addition to well-known issues, such as a proposal to consolidate banking regulators into a single agency and create a new consumer protection supervisor, a range of other provisions concern the industry, including tough restrictions on derivatives, a revised method for determining deposit insurance premiums and a requirement that large firms issue new debt instruments.

"It's a revolutionary bill. It just changes the regulatory and supervisory landscape in a very dramatic way," Gil Schwartz, a partner with the law firm Schwartz & Ballen, said of the 1,136-page measure.

The list of objections is so long that industry groups are uncertain what to target first. That has led the American Bankers Association (ABA) to conclude that blanket opposition is the best bet.
"We just cannot sit down and look at every single issue every time it comes up; there are just hundreds of them," said Ed Yingling, the ABA's president and chief executive.

As a result, the ABA has opted to oppose the entire bill outright, even though it agrees conceptually with some points. "We are on record for over a year supporting the major planks of reform such as a systemic oversight council, a resolution mechanism, and filling gaps in the regulatory system, but we are opposing this bill," Yingling said. "Features in it are so negative that the message we are sending is we just oppose the draft."

Industry representatives will not have a clear read on where the rest of the Senate Banking Committee stands until Thursday, when the panel formally convenes to begin debate on the legislation.

Dodd is expected by next week to have a manager's amendment that makes technical corrections but no substantive changes. Substantive amendments to change the bill are due Nov. 23, and Dodd hopes to hold a vote on the bill shortly after Congress returns from its Thanksgiving recess in early December.

With some tweaks, the Connecticut Democrat is expected to be able to push the bill out of committee on a party-line vote, but he is expected to have to make substantial changes to succeed in passing the bill through the full Senate.

Big banks and community banks have already begun to track separate issues.

The largest institutions are keying on provisions that would create a new consumer protection agency, eliminate national bank preemption, force most derivatives contracts to be cleared by exchanges and require large, systemically important firms to issue debt that can be converted to equity. Another concern is that a new systemic-risk council, which would have the power to break up large, complex institutions that pose a threat to the economy, would cap the size of banks.

Small banks are also focused on the consumer financial protection agency and a provision that would specifically put the enforcement of the Community Reinvestment Act under the new supervisor. But they are most worried about the proposed consolidation of regulators, arguing such an agency would favor the large banks and effectively undermine the dual banking system.

They are also pushing for the bill to take a tougher stance on commercially owned banks. Dodd's bill would put a three-year moratorium on commercial firms seeking to buy or charter industrial loan banks, but would not ban such purchases outright.

"The CFPA is something we obviously have huge concerns with," said Steve Verdier, a senior vice president for the Independent Community Bankers of America. "We're also disappointed that they just have a moratorium on the ILC loophole."

Scott Talbott, the head lobbyist for the Financial Services Roundtable, said his group will "multiply, not divide its efforts" and fight several aspects of the bill at once. He cited additional issues, including a requirement that banks retain 10% of the risk in securitizations, proposed increased liability through third parties, and a provision giving shareholders a nonbinding vote on executive compensation. "We have a number of concerns with the Dodd bill and we will focus on all of them, from the CFPA to the 10% risk-retention requirement, to shifting the deposit base," Talbott said.

Several large-bank lobbyists said they worry that the Dodd bill does not provide enough room for customized derivatives trades by forcing most swaps to be centrally cleared and traded on exchanges. The bill also does not include exemptions for end users of derivatives that were adopted by the House. "Our primary issues on derivatives have been the need to preserve the concept of customized contracts, of not forcing everything on to an exchange or even to mandate that everything be cleared," said Scott DeFife, the top lobbyist for the Securities Industry and Financial Markets Association.

Large banks also object to how the bill would calculate deposit insurance premiums. Currently, premiums are based on domestic deposits. But the legislation would require the Federal Deposit Insurance Corp. to base regular assessments on assets — a move that would cause larger institutions, which rely less on deposits for funding, to pay more.

Some large banks oppose a requirement that large institutions prepare "funeral" plans detailing a plan for their unwinding should they fail. They contend that doing so would lay bare business strategies that would give competitors an unfair advantage.

The Roundtable is also fighting a proposal that would require institutions to bulk up on so-called contingent capital — a hybrid debt instrument that could be converted to equity in a crisis.
"The cost of that instrument is going to be too high" and the measure could spook investors, Talbott said.

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