U.S. Banking Regulations and Market Control: Foreign Investors and Nonbanking Industries Interest in Status Quo

David Wyss, chief economist at Standard & Poor’s, recently reported to The Washington Times that the S&P is concerned that the financial reform legislation, now pending as a Senate bill, would have adverse effects on foreign investors. Wyss states that “nearly half of the government’s publicly held debt” is held by foreign investors and the pending reform would be seen as the U.S. government’s “attempts to intimidate the Fed” and an attack on the Federal Reserve System’s independence.

Foreign investors are also looking at the U.S. Congress’s delay in reappointing Federal Reserve Chairman Benjamin Bernanke. On December 17, 2009, the Senate Banking, Housing and Urban Affairs Committee sent Bernanke’s nomination to the floor. A populist grassrote movement is developing in the U.S. against Bernanke’s reappointment. Sen. Bernie Sanders (I-Vt) managed to gain tripartisan support to place a hold on the senate vote until January 2010.

U.S. Government Concern with Fed Supervision and Transparency

Within the financial market reformation debate, U.S. lawmakers have constantly raised the issue of Fed transparency. Sen. Richard Shelby (R-Ala.) expressed the concerns of the major political parites in his questions to Bernanke at the December 3, 2009 reconfirmation hearing:

“If we were to go back, Mr. Chairman, and review the minutes and transcripts of all the Federal Open Markets Committee (FOMC) meetings between 2003 and 2008, I wonder what fraction of the time would have been devoted to issues involving supervision and regulation of … holding companies. Was it half the time? Was it a fourth of the time?”

Bernanke initially responded that in a typical meeting “there would be very little discussion of supervision.” He qualified, however, that “[r]ecently we’ve talked about it quite a bit because of the financial crisis,” he said. “But it depends on the situation.”

“‘Congress has a seat’ on the Fed’s rate setting committee,” said Bernard Baumoh, chief global economist at the Economic Outlook Group in a 12/30/09 The Washington Times article. “[A]s long as the Senate strings out a vote on Mr. Bernanke’s nomination and [on the] legislat[ive] debate” the U.S. government could maintain its seat on the FOMC.

The Elephant in the Room: Non-regulation of the Nonbank Financial Sector

Another question regarding direct government control over regulation of the U.S. banking industry is whether the nonbank financial sector will continue to go unregulated? There has been a huge development within the financial industry of financial entities, products, and transactions that make no reference to the word “bank” in their names.

The biggest of these financial growth markets include hedge funds, holding companies, and derivative trading. The growth of pay day lending within the U.S. domestic market also raises the issue whether there needs to be greater consumer protection against usurious payday lending financing. Charles S. Gardner, former senior official at the International Monetary Fund, notes that the nonbanking sector even operated outside of the reach of the Fed and expresses great concern regarding unregulated derivative trading.

“Requiring open trading of derivatives will help regulators identify potentially risky credit creation outside the regulated banking industry,” writes Gardner in his recent article “What the Senate Must Do Now.” Gardner proposes that the U.S. government needs to take a leading role in fostering global financial regulations.

A Senate floor vote is expected on Bernanke’s reappointment, but has been held over to January 2010. According to a joint statement released by lead negotiators, a “deal could be struck before the Senate reconvenes in January” on the pending financial reforms regulations.