US financial reforms passed by Senate; Volcker rule enacted

The US Senate has approved the largest overhaul of financial regulation since the Great Depression, which is aimed at averting a repeat of the recent credit crisis.

In a major victory for President Barack Obama, the reforms will bring added regulation to Wall Street and aims to improve mortgage lending and eliminate the easy access to credit.

After being passed by the US House of Representatives earlier this month, Senators yesterday approved the bill by 60 votes to 39.

Speaking after the vote, Obama said the US public would never again be "on the hook for Wall Street's mistakes."

"Even before the financial crisis that led to this recession, I spoke on Wall Street about the need for common sense reforms to protect consumers and our economy as a whole," the President said.

"But the crisis came, and only underscored the need for the kind of reform that the Senate passed.

"The kind of reform that will protect consumers when they take out a mortgage or sign up for a credit card, reform that will prevent the kind of shadowy deals that led to this crisis, reform that would never again put taxpayers on the hook for Wall Street's mistakes."

The bill includes the controversial Volcker rule, which will curb proprietary trading by the largest financial firms. Banks will still be allowed to make small investments in hedge and private equity funds.

Institutions will also need to increase the amount of capital held to protect against bad loans.

A new federal agency will be designed to oversee consumer lending and outline new regulations for complex financial instruments.

Federal Reserve chairman Ben Bernanke said the legislation represented "a welcome and far-reaching" step toward preventing a replay of the recent financial crisis.

"It strengthens the consolidated supervision of systemically important financial institutions, gives the government an important additional tool to safely wind down failing financial firms, creates an interagency council to detect and deter emerging threats to the financial system, and enhances the transparency of the Federal Reserve while preserving the political independence that is crucial to monetary policymaking," he said.

"Even before passage of reform legislation, the Federal Reserve has been overhauling its supervision and regulation of banking organisations and working to strengthen financial market infrastructures and practices.

"We will be focused and diligent in carrying out our responsibilities under the new law."

But Harvey Pitt, chairman of the Securities & Exchange Commission from 2001 to 2003, says the regulator will struggle to cope with the 2300 pages of legislation.

He questions whether the limited number of staff will be able, as proposed, to produce and administer exams for thousands more broker dealers, registered investment advisers, and hedge funds.

Speaking in a personal capacity at London hedge fund CQS, he says: "The bill is an onslaught of new regulatory requirements [from] embarrassed and beleaguered US regulatory bodies."

The laws aim to avoid another crisis, but Pitt says they are premature because they come six months ahead of the publication of an official report in the US on what caused the meltdown.