Chris Dodd (D-CT), the chair of the Senate Banking Committee, has released a summary for his financial regulatory reform package. You can view the summary here. The 11-page draft, written in plain English, highlights a number of specific reforms, some of which differ from the companion legislation moving in the House. But there are also points of agreement.

At the top of the list is the Consumer Financial Protection Agency, a priority for the White House. Dodd’s CFPA would feature a five-member board with an independent director, charged with the responsibility of overseeing all financial products at the consumer level, including mortgages, credit cards, and payday lenders, and banning certain deceptive practices with real accountability and penalties. The draft is silent on whether independent auto dealers who sell financing for their vehicles would be exempt from the regulations, an exemption which passed the House Financial Services Committee in a controversial amendment.

The draft differs from House legislation in terms of systemic risk. Essentially Dodd would create a single regulator for the banking industry, separate from the Federal Reserve and the FDIC, that would impose new restrictions and be able to unwind large financial firms if they failed without bringing down the greater economy. In addition, a separate “Agency for Financial Stability” would write capital and leverage restrictions to prevent financial firms from growing too big, and provide a mechanism if one of those big firms actually failed. It could even force struggling companies to divest of some of their holdings. Here are an important series of rules for winding down “too big to fail” institutions:

Require Companies Provide Their Own Capital Injections: Requires institutions to issue long-term hybrid debt securities that will provide them with capital during a systemic crisis so failing institutions can provide their own life support.

Funeral Plans: Requires large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and subject to restrictions on growth and activity as well as required divestment if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.

Orderly Shutdown: Creates a mechanism for the FDIC to unwind failing systemically significant financial companies through receivership, but not open assistance. Costs of unwinding these companies will ultimately be charged to financial firms with assets of over $10 billion, not to the taxpayers.

The single banking regulator, which would be FINRA (The Financial Institutions Regulatory Administration) in Dodd’s legislation, would end regulator-shopping among banks and the confusion around overlapping oversight. Barney Frank’s legislation does not go this far, keeping some powers for bank regulation in the hands of the Federal Reserve and the FDIC. The chairman of the FDIC and the Fed would sit on the board of FINRA, but those organizations would be freed up to focus on their core competencies.

The bill would also reform the out-of-control derivatives market by adding regulation and safeguards; increase supervision on hedge funds; establish an Office of Credit Rating Agencies at the SEC to monitor their practices (many people believe that the failures of the rating agencies to properly assess risky securities is a prime reason for the financial meltdown); include the House’s “say on pay” provision that would allow shareholders to have a (non-binding) vote in executive compensation and corporate affairs; and protect investors through additional reforms at the SEC.

It’s also notable that Dodd included this in his draft:

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

Having tough regulations hardly matters when the regulators dismiss or ignore the fraud and abuse happening under their noses. Among other things, the bill would improve hiring practices at all these regulatory agencies, making sure that the staff is qualified to investigate and monitor complex financial instruments.

Dodd plans to begin work on his bill in the Banking Committee in the first week of December.

…Econblogger Mike Konczal at Rortybomb has a good analysis of the draft here.