The Hard Work on Financial Reform – Editorial

The procedural vote in the Senate last week on financial reform did more than end a Republican filibuster. It set up the real test of the Democrats’ resolve to enact the kind of change that the nation’s financial system so badly needs.

Achieving that requires passing amendments to strengthen the bill’s weak areas and defeating efforts to weaken its strong parts. Senate leaders may try to bridge partisan divides by hampering or blocking amendments on divisive issues. That would enable reluctant reformers from both parties to avoid politically difficult votes and appease the banking lobby, but it would not serve the public interest.

By the time this bill passes, the public needs to know who stands where on the most important reform issues, starting with these two:

TOO BIG TO FAIL Senators said Tuesday that they had reached an agreement on how to pay for seizing and dismantling big banks whose imminent failure could destabilize the system, but that doesn’t confront the more difficult issue of how to cut big banks down to a less threatening size. The Senate bill calls on regulators to impose higher capital requirements on riskier institutions. The aim is to make size and complexity so expensive that banks opt to restrict their size, but the new rules are unlikely to be enough.

The Senate bill also imposes needless delays on the enactment of the so-called Volcker rule, which would bar banks from making risky market trades for their own accounts and from owning hedge funds and private equity funds. Senators Carl Levin of Michigan and Jeff Merkley of Oregon, both Democrats, have an amendment to enact the Volcker rule without undue delays or tinkering.

Even that may not be enough. Democrats Sherrod Brown of Ohio and Ted Kaufman of Delaware propose size caps on banks that include limiting nondeposit liabilities to no more than 2 percent of gross domestic product. That would provide a necessary backstop against bailouts and decrease the political power of banks.