Financial Services Update – Issue 6

February 21, 2010

Authored by: Matt Jessee

Senate Financial Regulatory Bill

On Friday, Senate Banking Committee Chairman Christopher Dodd indicated he would introduce a new financial regulation reform bill next week.  The markup for the bill would therefore likely occur during the week of March 1-5.  Dodd and Republican Senator Bob Corker, who announced last week that the pair would be working together on the bill, are spending this week together on a Congressional trip to South America.  While there is bipartisan agreement on major issues including resolution authority, consumer protection remains one of the largest areas unresolved.  The role of the Federal Reserve in the new financial regulatory scheme also remains a point of contention.  In a change from the bill he introduced in November, Dodd is now likely to propose creating a council of regulators to monitor emerging risks, which would be chaired by the Treasury Secretary.

Fed Raises Discount Rate

On Thursday, the Federal Reserve Board of Governors raised the discount rate (the rate charged to banks for direct loans) by a quarter-point to 0.75 percent, effective Friday, February 19, 2010. It was the first increase in the discount rate since June 2006.  The change was sooner than most analysts had predicted which  indicated to many investors that the Fed would tighten monetary policy in the near future.  Banks have generally been reducing their reliance on the discount rate over the past year.  As of February 17th, banks had borrowed $14.1 billion as opposed to a year ago when borrowing stood at $65.1 billion.

Deficit Commission Creation

On Thursday, President Obama officially created the new deficit commission to be chaired by former White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson.  The Commission will be charged with reporting by the end of this year as to what steps Congress and the Administration should take to reduce the deficit to 3 percent of the gross domestic product.  Last year’s deficit equaled 9.9 percent of GDP, the highest point since World War II, and is projected to climb to 10.6 percent of GDP this year.

Bernanke to Testify Before House Panel

On Wednesday, it was announced that Federal Reserve Chairman Ben Bernanke would appear before the House Financial Services Committee on February 24th to deliver his semiannual report on the state of the economy.  Bernanke will likely be asked about the Fed’s withdrawal of liquidity from the banking sector. The Fed’s last meeting included disagreement from some Governors regarding the rates language and timing of the sale of the Fed’s “toxic” mortgage assets.

Congress Investigates Administration’s Mortgage Program

On Thursday, it was announced by Rep. Edolphus Towns (D-NY), Chairman of the House Oversight and Government Reform Committee, that he has launched an investigation into the Obama administration’s troubled mortgage relief program.   According to recent Treasury Department data, fewer than 200,000 borrowers have received a permanent change to their loans.  The Administration originally said 3 to 4 million borrowers would be able to take advantage of the program before it expires in 2012.

Paulson Favors Reform But Opposes Volcker Rule

On Tuesday, former Bush Treasury Secretary Henry Paulson wrote an op-ed in the New York Times advocating for reform of the financial regulatory system saying “’Delays [in reform] are creating uncertainty, undermining the ability of financial institutions to increase lending.”  However, Paulson also wrote that he opposed the recently released proposal by White House Senior Advisor Paul Volcker to bar banks from mixing proprietary trading with traditional banking services.  He went on to say, “Rather than dictating a set of rules that will become out of date as the markets evolve, policy makers should devise legislation that ensures that regulators have the authority to tackle the issue of size and all potential systemic risks.”