Congress on Thursday passed the stiffest restrictions on banks and Wall Street since the Great Depression, clamping down on lending practices and expanding consumer protections to prevent a repeat of the 2008 meltdown that knocked the economy to its knees.
Here are highlights of the compromise legislation to overhaul financial rules:
» Oversight. A 10-member council of regulators led by the treasury secretary would monitor threats to the financial system. It would decide which companies were so big or interconnected that their failures could upend the financial system. Those companies would be subject to tougher regulation.
If such a company teetered, the government could liquidate it. The costs of taking such a company down would be borne by its industry peers.
The council could overturn new rules proposed by the consumer protection agency. That’s supposed to happen only to rules deemed a threat to the financial system.
» Consumer protection. A new independent office would oversee financial products and services such as mortgages, credit cards and short-term loans. The office would be housed in the Fed.
Auto dealers, pawn brokers and others would be exempt from the bureau’s enforcement. For community banks, the new rules would be enforced by existing regulators.
The oversight council could block rules proposed by the consumer agency, but only if they determine the regulations would threaten the system.
» The Federal Reserve. The Fed would lead the oversight of big, interconnected companies whose failures could threaten the system. Those companies would be identified by the council of regulators.
The Fed’s relationships with banks would face more scrutiny from the Government Accountability Office, Congress’ investigative arm. The GAO could audit emergency lending the Fed made after the 2008 financial crisis emerged. It also could audit the Fed’s low-cost loans to banks, and the Fed’s buying and selling of securities to implement interest-rate policy.
The Fed also would have to set lower limits on the fees that banks charge merchants who accept debit cards.
» Capital cushions. Big banks would have to reserve as much money as small banks do to protect against future losses. But big banks would have to replace hybrid forms of capital called trust preferred securities with common stock or other securities. Banks with under $15 billion in assets wouldn’t have to replace those securities, but could not add more to their reserve funds.
» Bank restrictions. Companies that own commercial banks could no longer make speculative bets for their own profits. Banks will be allowed to invest up to 3 percent of their capital in private equity and hedge funds.
» Executive pay. Shareholders would vote on executive pay packages. But the votes wouldn’t be binding. Companies could ignore them.
The Fed would oversee executive compensation to make sure it does not encourage excessive risk taking. If a payout appeared to promote risky business practices, the Fed could intervene to block it.
» Credit rating agencies. Credit rating agencies that give recklessly bad advice could be legally liable for investor losses. They would have to register with the Securities and Exchange Commission.
Regulators would study the conflict of interest at the heart of the rating system: Credit raters are paid by the banks that issue the securities they rate.
» Mortgage loans. Lenders would have to make sure mortgage borrowers could afford to repay.
Lenders would have to disclose the highest payment borrowers could face on their adjustable-rate mortgages. Mortgage brokers could no longer receive bonuses for pushing people into high-cost loans.