Banks, get your reserves up!

Chase bank sign in New York City

TEXT OF STORY

Tess Vigeland: The most sweeping financial reform bill in more than 50 years took a big step toward becoming a reality today. The Senate voted to wind down final debate. Now the clock starts ticking on a narrowed list of amendments. A final vote might come as early as tomorrow. We'll have more on what's in it in a moment. But first -- one thing the bill does is impose tough capital requirements on big banks. Banks don't like it. But, surprise, surprise, the Treasury Department and the Fed are against it, too.

John Dimsdale explains why.


John Dimsdale: The Senate bill directs regulators to set the same capital requirements for big banks that are now imposed on smaller banks. The Obama Administration supports higher cash reserves so banks can cover their own liabilities and make future bailouts unnecessary.

But the Treasury Department and regulators at the Federal Reserve oppose the minimums set by the Senate bill. Assistant Treasury Secretary Michael Barr says that's in part because the U.S. is currently in negotiations with other countries to set international capital standards for global banks.

Michael Barr: And we don't want to have a provision in the law that would predetermine the outcome of that conversation or excessively tie our hands in making sure those standards are tougher and stronger and better going forward.

Banks oppose higher cash reserves, saying the money they'll have to set aside will take away from loans they should be making to help businesses create jobs. Robert Litan at the Brookings Institution says that's true in the short run.

Robert Litan: Right now, at least for the next six to 12 months -- and it could be longer -- banks are nervous about the strength of the recovery and that feeds into nervousness about their willingness to make loans. And anything that would make them even more nervous is something that we don't want.

He thinks Congress should hold off requiring stiff new capital reserves until the economy recovers. By then, he says, banks will be earning enough money to set aside a cash cushion without jeopardizing the loans that will keep the economy growing. Tess?

Vigeland: Thanks, John. Marketplace's John Dimsdale who is still with us now live from our Washington bureau. And John, this looks like a critical moment in the legislation, is it?

Dimsdale: Well, this is generally accepted the most comprehensive reform of the financial system in the 70-80 year since the aftermath of the Great Depression. Maybe even longer than that -- as President Obama mentioned in his appearance at the Rose Garden, just after this afternoon's Senate vote.

President Obama: Because of Wall Street reform, we'll soon have in place the strongest consumer protections in history.

Dimsdale: And you know, I think another measure of just how important this reform is, some of the volatility in the stock market that we've seen this week is likely to be attributed to some of the reaction to how this bill will affect businesses and the economy's future.

Vigeland: So you mentioned the tougher capital requirements, what else does this road map now contain?

Dimsdale: Well, it sets up a brand new consumer financial protection agency that would set standards and make regulations to protect consumers from predatory lending, excessive fees and interest rates. Banks would have to spin off their derivatives trading into separate companies to reduce some of the risky behavior that got us into this crisis. The bill makes it easier to liquidate failing banks; there will be no more bailouts. Consumers have better access to their credit scores. There are stronger shareholder rights to limit salaries of bank executives, and there are some credit card reforms.

Vigeland: So, then give us an idea of what is left to do. They voted to end debate today, but as I understand it -- and as we mentioned earlier -- the clock is now ticking on some amendments that they still didn't get to. What are those?

Dimsdale: That's right. There are a couple things that they still want to resolve before a final vote. There's an amendment that would ban commercial banks from making speculative trades with their own money. And there's another one that would exempt auto dealers from oversight of the new consumer protection bureau. The auto dealers argue that this could stifle a big part of their business -- the loans that they make to new car buyers. So assuming that these issues can be dealt with, the Senate could conceivably get to a final vote before the week is out, and then the Senate and House have to reconcile their two versions. And they vote again -- full House, full Senate -- before sending a final bill to the president, ideally, by July 4.

Vigeland: All right, thanks so much John.

Dimsdale: You're welcome.

Vigeland: Our Washington bureau chief John Dimsdale joining us live with the latest on the financial reform bill.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

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