Source: The Associated Press

U.S. financial regulatory reform received Senate approval Thursday, and is expected to soon be signed into law by President Barack Obama.

The bill promises sweeping changes to the U.S. regulatory system designed to promote financial stability by improving accountability and transparency in the financial system, improve oversight, bolster consumer protection, and reform the derivatives market, among other things.

While the reform has now been passed, it leaves plenty of unanswered questions, and much of the detail is to be filled in by the regulators on the ground. New York-based research firm, CreditSights Inc. says that the result is continued uncertainty for financial firms, which could impede the economy.

“Although we agree that there needs to be careful consideration and application of the legislation, the outcome in the short run seems to be that banks continue to conserve capital and maintain excess levels of liquidity while they await the final rules. This could have the effect of dampening economic growth and delaying the economic recovery, until there is a clearer picture of where some of these major issues will shake out,” CreditSights says.

Moreover, it is not convinced that the bill does enough to correct the problems in the financial industry that led to the crisis in the first place. CreditSights argues that the bill doesn’t do enough to improve the credit risk assessment process, and does not address the frequent power imbalance between the front office exposure originators/traders and the back-office risk managers. It also worries that the new oversight bodies are comprised of regulators and central bankers who missed the red flags leading up to the crisis in the first place.

“The natural question is whether this Bank Act will work as intended and whether it solves the problems that led to so much poor group decision making in the financial industry, among consumer borrowers, and over decades of legislative and regulatory process. The practical answer is that ‘we shall see’,” i CreditSights concludes.

The financial industry pushed back aggressively against a number of the reforms that were proposed in earlier versions of the bill, but now seems resigned to it. Steve Bartlett, president and CEO of the Financial Services Roundtable noted that it hasn’t endorsed or opposed the bill. “As an omnibus bill, there is plenty here to like and a good bit to question,” he said.

“We accept the reality of this legislation as a statutory framework for regulatory structure,” he added. “Our goal is to turn our attention from the uncertainty of legislative action to the certainty of the industry’s commitment to make reform work, to take these legislative changes, and the regulatory changes to follow, and make reform work for the American economy.”

Ben Bernanke, U.S. Federal Reserve Board chairman, calls the bill, “a welcome and far-reaching step toward preventing a replay of the recent financial crisis”. He noted that it strengthens the supervision of systemically important financial institutions, gives the government a tool to safely wind down failing financial firms, and boosts surveillance of emerging threats to the financial system.

“Even before passage of reform legislation, the Federal Reserve has been overhauling its supervision and regulation of banking organizations and working to strengthen financial market infrastructures and practices. We will be focused and diligent in carrying out our responsibilities under the new law,” Bernanke said.

IE