Bankers would retain some say over the operations of the 12 regional Federal Reserve Banks but would lose their ability to vote for regional bank presidents under a House-Senate deal Thursday on a broad financial regulation bill.
The compromise between House and Senate negotiators diluted a Senate plan that would have made the Fed far more independent of the banking industry.
Separately, House members sought to soften a Senate requirement that would have toughened standards on how much money banks should hold in reserve to guard against losses.
Senators on the negotiating panel accepted House demands that bankers be allowed to still serve on regional bank boards of directors and appoint other nonbank directors. Bankers, however, would lose their say in the selection of regional presidents.
How Fed banks are governed is important because regional bank presidents sit on the Fed's monetary policy committee, whose decisions setting interest rates affect the pocketbooks of every American.
Thursday's agreement was part of a wide-ranging negotiation on a broad restructuring of Wall Street regulations. Major issues still remained unresolved, including how much capital banks should hold in reserve and how to police markets dealing in complex, largely unregulated securities known as derivatives.
Rep. Barney Frank, D-Mass., the chairman of the negotiating panel, and Senate Banking Committee Chairman Chris Dodd, D-Conn., want to complete the bill so that the House and Senate can vote before July 4.
On capital standards, the House offered to amend a Senate provision that would require large banks to increase their reserve funds and to no longer count as capital certain hybrid securities. Banks have argued that eliminating those assets — known as trust preferred securities — from bank reserves would cost banks about $130 billion in lost capital.
The House version would let all banks retain the securities they already have as capital, but they could not use new trust preferred securities as capital. Dodd countered late Thursday, offering to only let banks with assets under $10 billion to benefit from such a grandfather clause. Bigger banks would have five years to phase in to the new standards.
The Obama administration prefers no specific capital standards, hoping to have a freer hand to negotiate international standards with the largest foreign economies.
Dodd is eager to keep the capital provision as close to the original Senate bill because it was championed by Sen. Susan Collins of Maine, one of only four Republicans to vote for the final bill. With 60 votes needed in the Senate to overcome blocks on contentious legislation, Dodd can't afford to lose any support.
Still in limbo was a derivatives provision that would force banks to spin off all their derivatives business into subsidiaries. The provision was inserted into the Senate bill by Sen. Blanche Lincoln, D-Ark., with the support of consumer groups and labor organizations. Her surprise primary election victory this month strengthened her hand and won the backing of Dodd, who had previously withheld his support.
But members of the House New York delegation were circulating a letter Thursday among lawmakers opposing the Lincoln language.
"We are deeply concerned by the very real possibility that, as a result of the Senate derivatives provision, America's largest financial institutions will move their $600 trillion derivatives businesses overseas, at the expense of both the U.S. economy, as well as the economy of New York State and New York City," said the letter from Democratic Reps. Michael McMahon and Gary Ackerman.
The letter follows a similar one to lawmakers from New York Mayor Michael Bloomberg.
The Senate is not expected to take up the provision until next week. Lincoln has vowed to fight for it, but has already clarified that banks would have two years to transfer the business to subsidiaries.
Thursday's House-Senate agreement also eliminated a Senate plan that would require the president of the United States to appoint and the Senate to approve the president of the New York Federal Reserve Bank. The New York bank had been singled out because it supervises the nation's biggest banks and because the New York regional bank president has a permanent seat on the Fed's monetary policy committee.
The Senate plan also would have prohibited bankers from serving on the regional boards of directors.
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