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Financial Services Regulatory Relief in the 109th Congress: H.R. 3505 and S. 2856

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Abstract:

The Financial Services Regulatory Relief Act of 2005 (H.R. 3505) was passed by the House on March 8, 2006. On May 4, 2006, the Senate Banking Committee unanimously reported the Financial Services Regulatory Relief Act of 2006 (S. 2856). On May 25, 2006, the full Senate passed S. 2856 and sent it to the House. Since the two bills contain differing provisions, a conference will be required to iron out differences between them.

This report gives an overview of the major regulatory relief provisions in H.R. 3505 and S. 2856, focusing on their potential impact on bank concentration. The report examines both bills' provisions to assess whether they are likely to support or discourage bank consolidation. The consolidation of the banking industry arguably reduces competition, which could tend to raise the price of banking services. On the other hand, there is empirical evidence that shows economies of scale in banking, including economies in complying with banking regulations, suggesting larger banks might be able to provide banking services at lower cost than smaller banks.

H.R. 3505 and S. 2856 would provide regulatory relief for large and small depository institutions. The net potential impact of these provisions is ambiguous at this stage. It is difficult to predict how many institutions (from credit unions to bank holding companies) will adopt the provisions, and what impact the provisions will have on the adopting institutions' positions in the marketplace. Some consumer groups are concerned that H.R. 3505 could weaken consumer protection. Because of similarity in the two bills' provisions, it is likely that consumer groups will have similar concerns about S. 2856.

Overall, the bills are more alike than different. The key differences between H.R. 3505 and S. 2856 are in the manner in which H.R. 3505 deals with depository institution affiliates (in Title V), the regulatory burden of complying with the Bank Secrecy Act (in Title VII), clerical changes and technical amendments to current banking laws and regulations (in Title VIII), the manner in which S. 2856 deals with the definition of a broker in the Securities Exchange Act of 1934 (in Title I), the authorization of the Federal Reserve Board to pay interest on depository institutions' reserves held by its banks (in Title II), the financial instruments eligible to be used as collateral (in Title IX), and mandates for studies and reports on regulatory burden from the Comptroller General and Secretary of the Treasury (in Title X).

This report will be updated as developments warrant.