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The Restoring American Financial Stability Act of 2010


June 3 - The following summary was compiled from a number of sources, including the Senate Banking Committee and the American Bankers Association, plus newspaper accounts from The New York Times and The Wall Street Journal.

The Senate passed the measure May 20 and it must now be reconciled in conference committee with similar legislation passed by the House last December. The banking committee chairmen are projecting they will have a finished bill ready for the president’s signature by July 4.

Consumer Financial Protection Bureau

This would be led by an independent director appointed by the president and confirmed by the Senate. It would have a dedicated budget paid by the Federal Reserve and would be housed within the Federal Reserve.

It would be able to autonomously write rules for consumer protections governing all entities — banks and non-banks — offering consumer financial services or products. Farm Credit Service lenders are exempted.

It would have authority to examine and enforce regulations for banks and credit unions with assets of more than $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers and foreclosure scam operators) and large non-bank financial companies, such as large payday lenders, debt collectors and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.

The CFPB consolidates consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, FDIC, Federal Reserve, National Credit Union Administration, Department of Housing and Urban Development and Federal Trade Commission.

It will coordinate with other regulators when examining banks and consult with regulators before a proposal is issued. Regulators could appeal regulations they believe would put the safety and soundness of the banking system or the stability of the financial system at risk.

Financial Stability Oversight Council

A nine-member council of federal financial regulators and an independent member will be chaired by the Treasury Secretary and made up of the chairmen of the Federal Reserve Board, Securities and Exchange Commission, Commodity Futures Trading Commission, FDIC, Federal Housing Finance Agency, the new Consumer Financial Protection Bureau, and the Comptroller of the Currency. The council will have the sole job to identify and respond to emerging risks throughout the financial system.

The FSOC will make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.

It is authorized to require, with a 2/3 vote, that a nonbank financial company be regulated by the Federal Reserve if its failure would pose a risk to the financial stability of the United States. Also with a 2/3 vote, it could approve a Federal Reserve decision to require a large, complex company, to divest some of its holdings if it poses a grave threat to the financial stability of the United States — but only as a last resort.

Too Big to Fail

The FSOC will have the ability to require nonbank financial companies that pose a risk to the financial stability of the United States to submit to supervision by the Fed.

Large, complex financial companies will be required to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.

An orderly liquidation mechanism is created for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors bear losses and management will be removed.

The Treasury, FDIC and the Federal Reserve will be required to all agree to put a company into the orderly liquidation process. A panel of three bankruptcy judges must convene and agree within 24 hours that a company is insolvent.

To prevent bank runs, the FDIC can guarantee debt of solvent insured banks, but only after meeting serious requirements. The Treasury Secretary approves terms and conditions and sets a cap on overall guarantee amounts.

The Volcker Rule

Regulators are required to implement regulations for banks, their affiliates and holding companies to prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds and to limit relationships with hedge funds and private equity funds. Nonbank financial institutions supervised by the Fed will also have restrictions on proprietary trading and hedge funds and private equity investments. Regulations will be developed after a study by the FSOC and based on their recommendations.

Interchange Fees

The Federal Reserve is given new authority to regulate and limit the fees businesses pay to card companies — specifically payments processed through Visa and MasterCard networks. American Express and Discover cards are not affected. The Fed is directed to cap fees at a level that is “reasonable and proportional” to the cost of processing transactions. Visa and MasterCard rules requiring businesses to accept credit and debit cards even on small transactions and prohibiting businesses from offering discounts based on method of payment are eliminated.

Bank Holding Company Capital

The regulatory capital calculation for bank holding companies will have to match the bank version, thus excluding trust preferred securities and Treasury TARP investments in holding companies as Tier 1 capital.

Bank Supervision

The Federal Reserve will supervise all bank holding companies and state member banks, plus savings and loan holding companies.

The Office of the Comptroller of the Currency supervises all national banks, as well as federal savings associations.

The FDIC continues to supervise state non-member banks and will also supervise state-chartered savings associations.

The Office of Thrift Supervision is eliminated and no new thrift charters will be approved. Existing institutions are grandfathered.

Federal Reserve Oversight

A vice chairman for supervision, designated by the president, will develop policy recommendations regarding supervision and regulation for the Federal Reserve Board and will report to Congress semi-annually on supervision and regulation efforts.

No company, subsidiary or affiliate of a company that is supervised by the Federal Reserve will be allowed to vote for directors of Federal Reserve Banks; and their past or present officers, directors and employees cannot serve as directors. The president of the New York Federal Reserve Bank will be appointed by the President of the United States, with the advice and consent of the Senate.

Federal Reserve Lending

The Federal Reserve would be prohibited from emergency lending to an individual entity. The Secretary of the Treasury must approve any lending program and such programs must be “broad-based” and not aid a failing financial company. Collateral must be sufficient to protect taxpayers from losses.

The Fed would report to Congress about any financial assistance it provided, including the identity of borrowers from the Fed and the amount borrowed and any Fed program would have to end in a "timely and orderly fashion."

The Government Accountability Office is to conduct an audit of the Fed and Reserve Banks within a year, and the Fed would have to report the identity of every borrower and details about each loan made since 2007 or after the effective date of the legislation.

Insurance Assessments

The deposit insurance assessment base is redefined as average consolidated total assets minus average tangible equity. An additional subtraction from total assets is authorized for bankers’ banks and custodial banks. The changes should be more fair to community banks and require larger banks to pay more to support the Deposit Insurance Fund.


Mandatory clearing and exchange trading would be required for most derivatives. Tough capital and margin requirements and significant recordkeeping and real-time trade reporting obligations would be imposed. The legislation broadly defines “swap dealers” and “major swap participants” and, according to the American Bankers Association, essentially eliminates the ability of banks of all sizes to regularly engage in the purchase and sale of swaps — including interest rate swaps — in the ordinary course of business.

Investor Protection

Shareholders will have a say on pay with the right to a non-binding vote on executive pay. The SEC will have authority to grant shareholders proxy access to nominate directors and directors will have to win by a majority vote in uncontested elections.

Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants to strengthen their independence from the executives they are rewarding or punishing.

Public companies are required to set policies to take back executive compensation if it was based on inaccurate financial statements that don't comply with accounting standards.

The SEC is directed to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.

An investment advisory committee and investor advocate would be created within the SEC. A new Office of Credit Rating Agencies is created, reporting directly to the SEC chairman. It would be authorized to issue new rules for internal controls, independence, transparency and penalties for noncompliance.

Sellers of complex financial products, including mortgage-backed securities, would be required to retain some portion of the credit risk.


Standards established in the Barnett Bank case are largely preserved, with the Comptroller of the Currency authorized to preempt state laws on a case by case basis. Operating subsidiaries and agents of national banks and federal savings associations would not have the same preemption protections.