One cheer for financial reform; more cheers could follow

he past week has seen important progress on legislative efforts for financial regulatory reform, including advances on both substantive and symbolic (but politically charged) issues.

Non-bank resolution is the most important substantive issue, and the agreement between Senate Banking Committee Chairman Chris Dodd and Ranking Member Richard Shelby resolves (so to speak) defects of the original Dodd proposal that would have fostered bailouts.

In essence, non-bank resolution will now allow the Federal Deposit Insurance Corporation (FDIC) to provide collateralized lending to a failing non-bank financial firm but require a vote of Congress to intentionally deploy public capital. Losses on the provision of liquidity will be clawed back from creditors to the extent that these counterparties receive more than would have been the case in a liquidation of the firm through a Chapter 7 bankruptcy proceeding. In other words, government money can be provided if it is well-collateralized, but if there are inadvertent losses, the counterparties who benefit are on the hook and not some deep-pocketed institutions that might make good political punching bags.

Read the full article on American.com

Phillip Swagel is a visiting scholar at AEI

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