The Conference Challenges Congress Faces for Financial Reform

The House and Senate may have both passed financial regulation bills, but the battle to create the final legislation isn't over. Next up: the two chambers must reconcile their bills. The essence of these two bills overlaps fairly well, as explained here. But the details contain a number of significant differences that have to be hashed out. Here are some of the most important.

Consumer Financial Protection Agency/Bureau

Congress needs to worry about more than just what to call the new consumer watchdog. One of the biggest issues will be to determine where to put it. The Senate bill makes it an independent branch of the Federal Reserve, while the House version just creates it as a new agency altogether. House Financial Services Chairman Barney Frank (D-MA), who will be the lead negotiator for the House, has indicated he wants it independent. But Senate Banking Committee Chairman Christopher Dodd (D-CT), who will be the lead negotiator for the Senate, put it in the Federal Reserve to appease moderates. Either Dodd will have to convince some Senators that the agency should be truly independent or Frank will have to make peace with its presence in the Fed.

Some of the details of the powers and oversight of the agency/bureau also differ between the bills. One of the most notable differences is the auto dealer exclusion contained in the House bill. Even though the Senate's bill doesn't make this exception, expect the Senate to ultimately concur. It passed a resolution yesterday to direct conference committee to take this precise step, by a vote of 60 to 30. The White House, however, doesn't like the exclusion -- so you never know.


The derivatives language could be the most contentious of any section. The Senate bill took a very aggressive stance on this issue, and would force banks to put their derivatives businesses in separately capitalized affiliates. The House bill doesn't contain any such proposal. While it's unclear if Frank will go along with this provision, it matters more whether the House can pass a bill that includes the proposal. This could very well fall out of a final bill, especially if the conference process continues until after Blanche Lincoln's (D-AR) runoff primary on June 8th. She was the author of the controversial section.

Resolution Authority

Both bills agree on the need for a regulator to step in and wind down giant non-bank institutions that collapse. They also agree that it makes sense for the FDIC to take on this task. But there are a couple of key differences. In particular, the chambers disagree on the tools that the FDIC will have in its chest. The House version would give it a pre-funded sum of up to $150 billion to work with to cover the costs of resolution. The Senate, however, has no fund and will worry about expenses of resolution after-the-fact, with a loan from taxpayers until bankruptcy proceeds will (hopefully) pay back the costs. The Senate could win out on this one, as Frank's original bill also called for collecting costs after-the-fact, though through a different means. The provision was changed to a pre-emptive fund before it was finalized.

There are lots of other minor details to take care of here as well. The processes for determining how to wind down a firm aren't precisely the same in both bills. The House bill paid more attention to how the resolution authority would treat creditors. It seems plausible that when one chamber provides greater detail than the other, such provisions will simply be adopted in the final bill, assuming little objection. That would generally err on the side of the House, since it took more time to work out the details, compared to the Senate's rushed approach.

Break-Up Powers

Some advocates for cracking down on big banks wanted them broken up. Neither bill explicitly takes this step, but both bills allow for firms to be broken up under certain circumstances. The House version provides the new council the power to break up firms if a simple majority of its members believe the systemic risk cannot be regulated out of them. The Senate bill, however, only calls for breakup as a possible punishment for firms that don't provide the resolution authority adequate failure plans. In that case, two-thirds of the council and the Federal Reserve Board must consent to break-up.

It's quite possible that the House's provision, which was an amendment sponsored by Rep. Kanjorski (D-PA), could fall out of the final bill. The Senate refused to consider a provision that would have broken up large institutions, so Senators may reject the notion that the council should have broad authority to break up firms. Alternatively, the Senate might call for a stricter two-thirds vote standard.

Proprietary Trading

As explained at length here, both bills contain provisions that could lead to banning proprietary trading at financial institutions. Each depends on the whim of regulators, but the details differ. We'll likely end up with some sort of prop trading ban, though it might require a study or remain at some regulator's discretion. If a ban does happen, expect Frank to demand a few exclusions. He has already promised to fight to exclude insurance companies and bank asset management from the provision.


Its 15 to 1 leverage limit is an important, and often overlooked, aspect of the House bill. It's one of the few ways where its version is more aggressive than the Senate's. In fact, some Senators did try to impose leverage limits on financial institutions through amendments. Those attempts failed, however. As a result, it's a little hard to see how the House could manage to keep this provision alive in the final bill. But expect Frank to try.

Fed Audit

Each bill also contains a provision which calls for Congress auditing the Federal Reserve, but they differ significantly. The House's version came through an amendment sponsored by Rep. Ron Paul (R-TX). It's more aggressive than the Senate's version. The House would provide the ability for Fed audits in perpetuity on many aspects of its business. The Senate's version, however, provides for a one-time audit, specifically regarding the emergency stabilization measures it employed during the financial crisis. Since the House's version resembled the Senate's original proposal, sponsored by Rep. Bernie Sanders (I-VT), expect to see its new version win out. Sanders was forced to change it, because he didn't have the votes for the House's more aggressive approach.

Rating Agencies

Both bills attempt to reform the rating agencies, but the Senate bill goes much further. The House bill mostly just lightly regulates the agencies and allows investors to sue for gross negligence in rating. The Senate bill, however, allows investors to bring a lawsuit if an agency did not conduct a "reasonable investigation" -- a weaker standard. Moreover, the Senate bill would create a committee of investors and other market participants who assign a rating agency to assign every new securitization deal, thanks to an amendment by Sen. Al Franken (D-MN). It's unclear if the House will be on board with these stronger provisions.

As you may have noticed through this analysis, most of the differences among the two bills resulted from amendments. Even if some of these are shaven off, the essence of the legislation will still remain the same. Many of these details matter a lot, however. But ultimately, the conference committee must determine which of these details are politically popular so it can get a bill passed, not necessarily which are best for the financial system.