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Q&A: US FINANCIAL REFORM UNTANGLED

Q. WHAT ARE THE ROOTS OF THE DODD-FRANK OVERHAUL?

A. At the height of the financial crisis in 2008, US investment banks converted into holding companies so they could take emergency loans from the Federal Reserve, as well as taxpayer aid. Most of the capital distributed then has been repaid, but the public and politicians remain angry at Wall Street. The House and the Senate now need to approve the bill next week and Obama will have to ratify it for it to pass into law.

Q. WHAT DO THE RULES MEAN FOR AMERICAN CONSUMERS?

A. For the first time, mortgage lenders will have to verify a customer’s income, employment status and credit history. Supposedly predatory practices such as kick-backs for brokers who push consumers towards more expensive home loans will be eliminated. Retail banks will have to answer to a fresh regulator, the Consumer Financial Protection Bureau. And the federal insurance threshold for savers’ deposits will be raised to $250,000 (£166,000).

Q. HOW HAS THE CRACKDOWN BEEN SOFTENED?

A. Some proposals have fallen by the wayside due to political disagreement. Senator Blanche Lincoln’s attempt to entirely ban banks from derivatives-based activity was shot down by both Democrats and Republicans, for example. On other issues the banking community was able to put its side of the argument through organisations such as the American Bankers’ Association and the Derivatives Lobby.

Q. WHAT DOES IT ALL MEAN FOR BRITISH BANKS?

A. Although the coalition government has been watching the progress across the Atlantic with interest, the real question is to what extent the bill affects European Union politicians’ plans. The Dodd-Frank act’s $19bn tax on Wall Street may add some credibility to the EU’s proposed banking levy, while the establishment of a new super-regulator may give the EU’s drive to set up four pan-European entities momentum.