Understanding the new financial reform law

Congress recently passed landmark legislation — the full impact of which will not be known for years — that could bring monumental changes to the economy. Directed primarily toward large institutions that have been considered too large to fail, it also includes a number of consumer provisions.

A massive 2,300 pages — some label it a legislative monster — the bill represents the largest expansion of power over banking since 1933. It provides for hundreds of far-reaching new regulations and delegates wide discretion to 10 agencies to write them.

One of the first requirements is establishment of a controversial Financial Stability Council to keep watch over the financial system. The council, comprised of 10 members, will be chaired by the treasury secretary.

Another new agency, the Bureau of Consumer Financial Protection must be established within one year. It will have vast powers to enforce regulations relating to mortgages, credit cards and other financial products.

Among other provisions are evaluation of executive compensation, regulation of risky investments by larger institutions, higher capital requirements for big banks, more oversight of credit rating agencies and a review of fees banks charge merchants for customers who use debit cards.

How effective will the legislation be? The answer depends on whom you ask. Many opposed it on the basis that it will overwhelm banks with burdensome regulations and costly compliance. They stress that costs will be passed on to consumers through higher fees.

Others, blaming the financial debacle on the financial institutions, vigorously supported the bill. They contend the legislation will largely prevent future financial meltdowns.

A Wall Street Journal survey of economists found they were evenly divided on the overall merits of the bill. But they generally agreed the legislation will have only a minor role in reducing financial risk.

One thing seems certain. While some of the elements are worthwhile, the legislation raises a number of questions and creates uncertainty about its future impact.

Wayne Curtis is on the board of directors of First United Security Bank. He can be reached by e-mail at wc_curtis@yahoo.com.