The US senate last night passed a bill which team Obama is calling the start of the biggest overhaul in the way Wall Street operates since the Glass-Steagall act of 1932. And although there is still a long way to go before the final whistle blows, it certainly look as though some of America’s more swashbuckling financial activities may be about to get banished to the sin bin.
The vote went 59 – 39 in favour of the 1,500 page tome, portentously titled Restoring American Financial Stability Act. That’s a big ask for a single piece of legislation, however you look at it. Predictably, bankers' voices are already raised in anguish, amid claims that the bill has effectively shot the wrong fox and will do more harm than good to the country’s already battered finances.
So, as our transatlantic cousins like to say, Where’s the Beef? Well, it’s early days and all this may well change significantly, but as things stand now here are the highlights.
- There’ll be a powerful new consumer protection agency to police retail credit and mortgages.
- Deposit-taking banks may be banned from prop trading – trading with depositors' money – or speculating on their own account.
- Most of the $600bn derivatives market will have to be traded through independent clearing-houses to increase transparency and oversight of deals.
- The authorities will be empowered to seize control of and even break-up failing institutions or those that are perceived to be ‘too big to fail'.
- The Federal Reserve will become a very powerful super regulator, and a much more systemic view of risk is likely to prevail.
Much of this seems sensible enough – in particular tightening up the retail market. Making sure that people who take out loans can afford to pay them back is pretty fundamental after all. And trying to bring some order to the fragmented and brain-achingly complicated world of derivatives is also laudable – if hard to achieve.
But the interventionist nature of many of these reforms will worry some – why should bankers who work for the government know any more than bankers who work for banks? In fact the opposite may be the case.
Bankers themselves are not keen, with many seeing it as a misguided attempt to punish banks for the financial crisis rather than a serious attempt at reform. It’s true that a financial system operating under these kind of rules would probably be less volatile than the one we have got used to in recent years. But it would also clearly be far less lucrative, and credit for both businesses and individuals would be more expensive and harder to come by.
Whether that is a good thing or not is a matter of opinion – but in the short term putting the brakes on banks is unlikely to help America’s economy recover more quickly.
Given the close ties between the markets in London and New York, it’s not going to do our immediate recovery prospects much good either. What with the Euro crisis in one direction and the prospect of a new pedestrianised Wall Street in the other, things in the City are looking a bit tricky just now…
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