By Kevin Fagan, Asst. News Editor -

Senator Christopher Dodd, D-Connecticut and Chairman of the Senate Banking Committee, put forward a proposal last week, calling for the most sweeping changes to financial rules since the Great Depression. The bill calls for a nine-member council led by the Secretary of Treasury to watch for system-wide or non-idiosyncratic risk. The bill also stipulates that the Federal Reserve must supervise the nation’s largest financial institutions in addition to the banks it presently regulates.

From the consumer side, the bill seeks to establish a consumer financial protection regulator independent of the Federal Reserve. The director would be appointed by the president, confirmed by the Senate and bankrolled by the Federal Reserve. Its charge would be to police banks and credit unions with more than $10 billion in assets to make sure mortgage rules are being followed. This aims to prevent one of the most important factors that led to the financial crisis: mortgages given to people who could not afford them who later defaulted, resulting in a toxic mess of mortgage-backed assets.

To prevent the need for more bailouts of our banking system, the bill calls for banks to be guided through a speedy bankruptcy process, rather than receiving a bailout. It also calls for a $50 billion resolution fund to be created from new taxes to cover the bankruptcy expenses. If a bank were to draw on these funds during a bankruptcy proceeding, there is a possibility of a new tax to bring the fund back to its initial level.

According to Philip Strahan, the John L. Collins Chair in Finance and professor at CSOM, there are potential problems with the bill. “Too-big-to-fail banks are worse after how the crisis was handled. There is no mechanism [in the bill] to unwind big banks.” Indeed, despite this new fund and the bankruptcy process, the actual size of our largest financial institutions would be unaffected by the bill.

In another major change, the Federal Reserve would have its role reduced to only regulating the nation’s largest banks with more than $50 billion in assets. The Federal Deposit Insurance Corporation (FDIC) would be given the power to regulate smaller banks.

Despite these major changes, the rest of the bill leaves the existing regulatory framework in place, despite criticisms that it is too fragmented to be effective. The bill includes a rule suggested by Paul Volcker, former Federal Reserve Chairman, disallowing financial firms from owning hedge funds and from engaging in speculative proprietary training using their own funds.

Although the bill seems to be a step in the right direction for those who favor reform of our financial system after the crisis, many have been disappointed that Dodd changed the bill substantially since his last proposal in November, based on the input of both Republicans and Democrats. A proposal for a “super regulator” who would take on the role now done by many smaller regulatory agencies was scrapped. Some derivatives would remain unregulated, though many would now pass through a clearinghouse to pinpoint the value of the trades.

So how quickly could this bill become law? Senator Dodd wants a vote on the bill in committee by the Senate recess on March 29th, with a vote by the entire Senate before the last week of May. The reason for the early vote is to avoid conflicts that could result from the midterm elections in November.