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US senate passes Wall Street reform bill

AFP

The US senate passed a bill reforming financial regulation by 59 votes to 39 on Thursday. The bill was one of President Barack Obama’s biggest priorities and will be the most dramatic banking regulation passed in America since the 1930s. The House of Representatives will now debate the bill and a compromise version is expected to be signed into law by July.

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The bill will increase restraints on banks and require better proof from borrowers that they can pay back mortgages.

Barack Obama said Americans will “never again pay for Wall Street’s mistakes”.

It will be debated in the House of Representatives next month, which is likely to produce a compromise version.

The proposed laws include a measure blocking International Monetary Fund aid packages without a guarantee that the money will be repaid.

“The reform I sign will not stifle the power of the free market – it will simply bring predictable, responsible, sensible rules into the marketplace,” said Obama. “Our goal is not to punish the banks, but to protect the larger economy.”

He criticised the financial industry for having spent millions of dollars in lobbyists and ads trying to block the bill.

Banks warned that the bill had already sent jitters through the markets

“Despite all the talk about this being a Wall Street bill, it, in fact, does tremendous harm to traditional banks on main street that had nothing to do with the crisis and that will now be less able to support the economy,” Ed Yingling, head of the American Bankers’ Association told the Financial Times. “This bill promised much-needed reform but has gone terribly wrong.”

Lobbyists are now targeting Barney Frank, chairman of the House financial services committee, who has written a more lenient version of the reform.

Four Republicans approved the bill. Two Democrats voted against it.

“To Wall Street it says ‘no longer can you recklessly gamble away other people’s money,'” said Democratic Senate Majority Leader Harry Reid. “It says to those who game the system the game is over.”

The bill

  • Consumer Financial Protection Bureau to be set up inside the Federal Reserve, but with complete independence from the central bank. It would monitor the selling of mortgages, credit cards and other loans.
  • Derivatives, financial products that are based on a bet of the future price of an asset, will only be allowed to be traded through central clearing houses, rather than directly from bank to bank.
  • Resolution authority the government can seize and wind up a large institution if it is in danger of failing and poses a risk to the broader financial system. It would have powers to wipe out shareholders and fire executives. Payments to creditors would be paid by the government but recouped later from levies on the industry.
  • Financial Stability Oversight Council chaired by the Treasury secretary would identify systemically significant companies and monitor markets. Stricter rules on debt and ready capital for systemically important companies. They will also have to draw up “living wills”, which explain how the company would be broken up in the event of failure.
  • Volcker rule: deposit-taking banks will no longer be allowed to engage in proprietary trading or own hedge funds or private equity firms.

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