Government

3 Questions The Finance Bill Doesn't Answer

The Senate just passed the big finance bill by a vote of 60-39. Presdient Obama will soon sign it into law.

But in the finance-overhaul drama, passing the bill is only Act I.

"What we have now coming up — and it's probably in some ways the more crucial point — is Act II of the play, where the details are going to be fleshed out," Lawrence Kaplan, a lawyer with Paul Hastings in Washington, told me recently.

There are several really important questions that the finance bill leaves unanswered. And it's likely to take years for regulators to answer them.

Here are three crucial issues.

Which companies are subject to the bill?

The Federal Reserve, in addition to regulating banks, will oversee some big companies that aren't banks.

For a company to fall under the Fed's authority, a council of federal regulators will have to agree by a 2/3 vote that there would be "negative effects on the financial system if the company failed." Or the council could find that a company's activities "would pose a risk to the financial stability of the U.S.," according to this summary of the bill.

So which companies fit that description? "We can guess who they are, but we don't know," Kaplan said. The list could include mortgage companies, credit-card companies, and others.

For national banks, when does federal law trump state law?

Lots of states have banking laws about things that are important to consumers — things like ATM surcharges, and mortgage fees.

There's been a long legal back-and-forth about when those laws apply to national banks, and when federal law trumps state law.

In general, the details of the new bill mean the legal pendulum is likely to swing toward upholding state laws, Kaplan said.

But the bill doesn't make clear which laws will stand. It leaves it up to a federal regulator to decide on a case-by-case basis — and the regulator's decisions arelikely to be challenged in court.

How much money do banks have to hold as a safety cushion?

This one sounds simple, but it's among the most important variables in determining how well banks can weather crises: How much money do banks have to hold in reserve? And how accessible does that money have to be?

These two issues are known as capital and liquidity requirements. The bill sets broad guidelines, but largely punts on the issue.

An amendment offered in the Senate would have big banks to hold bigger safety cushions, but it was opposed by the Obama Administration and ultimately defeated.

"Wat should liquidity requirements be? The bill doesn't really say," Charles Calomiris, a finance professor at Columbia, told us recently. "How exactly do we establish capital requirements that vary with the size and complexity of the institution? It doesnt really say."

Instead, capital and liquidity requirements are likely to be guided by international standards known as Basel III. Those standards are being negotiated this year.

And, as the WSJ reported this morning, banks appear to be gaining ground in their push to make the new Basel rules less stringent than originally proposed.

For more on the bill's unanswered questions: Listen to Tuesday's podcast, and read excerpts from our interview with Barney Frank.

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