Good, Bad and Ugly in Financial Reform

With health care out of the way, regulation of the financial industry tops the reform agenda in Washington. New York has a lot on the line.
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Crain's New York Business published this op-ed on April 4, 2010

With health care out of the way, regulation of the financial industry tops the reform agenda in Washington. New York has a lot on the line.

The financial industry employs 530,000 New Yorkers and generates another 1.5 million jobs in other sectors, contributing $200 billion a year to the region's economy. The city stands to gain from bipartisan reform that restores confidence in the U.S. financial system and puts public outrage over bank bailouts behind us.

The starting point for debate over reform is a bill introduced last month by Senate Banking Committee Chairman Christopher Dodd. It directs regulators to toughen bank reserve requirements, authorizes more comprehensive and rigorous oversight, amends the bankruptcy process to provide for the orderly shutdown of troubled firms, and establishes strict new oversight of derivative products.

These measures are all needed to avoid another collapse and limit taxpayers' exposure.

But the Dodd bill also contains proposals that could seriously damage New York's finance-based economy without making the American financial system better or safer. For example, the "Volcker rule," named for a venerable New Yorker, would seek to turn the clock back to an era when the financial industry was less integrated and less global. Breaking up big banks or limiting their lines of business would not prevent another crisis, but simply make U.S. institutions less competitive with their foreign counterparts.

Punishment seems to be the rationale for a Dodd provision that would threaten the viability of credit rating agencies by exposing them to huge litigation liabilities, risking thousands of local jobs and chaos in the bond markets.

Another provision would allow states to override federal consumer protection regulations and give state attorneys general the ability to enforce federal laws based on 50 different interpretations. This would make it more difficult and expensive for New York's national banks to compete in local markets and defeat the goal of establishing one clear set of rules that can be easily monitored and enforced.

Finally, Dodd would strip the Federal Reserve Bank of New York of its authority over hundreds of financial institutions and make its president a political appointee. The New York Fed is the anchor of New York's financial district, managing some $7 trillion a day in international payments and foreign exchange. Reducing its supervisory role and undermining its independence from politics constitute significant blows to America's stature among the central banks of the world.

Other congressional committees are contemplating new taxes on large banks--taxes that would drain their coffers just when they need to put their capital to work making loans to small businesses, financing home purchases and restarting the construction industry.

More federal bank taxes translate into a multibillion-dollar reduction in New York's state and local revenues.

We need financial reforms that strengthen the industry. We should vigorously oppose actions that would threaten our status as a world financial capital and weaken the U.S. position of leadership in the global economy.

Kathryn Wylde is chief executive of the Partnership for New York City.

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