Negotiators from the Senate and House will begin meeting this week to craft a final Wall Street reform bill, with banks facing changes that threaten their profits, if not their business models.
Some congressional Democrats want to fashion a bill that forces a basic banking industry restructuring, but leaders will have to balance that agenda against the need to forge compromise legislation that retains some Republican support.
Analysts are expecting that fundamental restructuring will be avoided, "This bill is more about profitability and less about viability. That means the legislation will hurt the banking sector, but it will not sink it," said Jaret Seiberg, a policy analyst at investment firm Concept Capital.
The delicate task of crafting a winning compromise will fall to Representative Barney Frank, who will chair the "conference committee" getting under way in a few days, and Senator Christopher Dodd, a consensus builder who will lead the Senate negotiating team.
Both lawmakers are old-school liberal Democrats with more than 60 years on Capitol Hill between them. They will need all of that experience to finish up a legislative project that is at the top of President Barack Obama's priority list.
Disputes loom over banks' lucrative dealings in derivative contracts, such as credit default swaps; the amount of capital they must set aside for hard times; and the trading they do on their own books unrelated to customers' needs.
A late amendment to the Senate's version of financial reform, approved last month, would limit fees on debit card transactions. It directly threatens the profits of card issuers, and banks are resisting it.
In all these areas, the banks are working to protect and preserve business models that have changed remarkably little since the 2007-2009 credit crisis that hammered economies globally and triggered huge taxpayer bailouts.
While key issues remain unsettled, enactment of a reform package, probably by mid-year, is seen as certain. It would be the biggest regulatory revamp since the Great Depression.
But one top investment strategist said on Monday the proposed reforms don't go far enough in tackling key problems in the banking system.
Richard Bernstein, chief executive officer of Richard Bernstein Capital Management said the reforms focus too much on preserving corporate entities rather than on the role these entities are supposed to play in the economy.
"I think it is immensely wimpy," Bernstein told the Reuters Investment Outlook Summit in New York.
The aim of banking should be to help build productive assets in the real economy, he said.
"As a policy maker in Washington your issue is if banks are lending in the domestic 50 states," Bernstein said. Policy makers should not care how profitable banks are and if they can do "currency swaps in Australia," he said.
The Senate approved its bill on May 20; the House passed a bill in December. The two versions must now be merged by the conference committee, whose final report must then be approved once more in each chamber before going to Obama to be enacted.
The Senate's 12 conference negotiators, both Democrats and Republicans, have been named. In the House, Frank has recommended eight Democrats to join the panel, but House Speaker Nancy Pelosi has final say.
House Republicans have not yet named their members. The definitive word on panel membership, a factor in shaping the bill, is expected on Tuesday or Wednesday, aides said.
Frank hopes to complete the panel's work by June 24, when the Group of 20 leading nations begins a conference in Toronto where international regulatory cooperation will be a topic. EU nations are also pursuing regulatory reforms.
A final U.S. package could give President Barack Obama leverage to push other G-20 nations to step up to the plate with their own reforms. The G-20 has already shelved an idea for a universal bank tax that get the industry to cover the cost of any future bailouts.
The conference committee's first substantive public meeting is expected on Wednesday or Thursday, with much speech-making but probably no real decisions. That will begin next week. The Senate bill will be the base text the panel works on.
The outlook for a plan that would force banks to spin off their swap-trading desks dimmed late last month when the White House made clear it was not among its core reform goals.
Swaps are among a class of financial derivatives traded in a $615 trillion, off-exchange market dominated by major firms such Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and Morgan Stanley.
Wall Street is lobbying to kill the swap-desk "push-out" plan. "The impact on the cost of capital and capital formation is really far-reaching here," said Sharon Brown-Hruska, a vice president of NERA Economic Consulting.
The plan's author, Democratic Senator Blanche Lincoln, has vowed to fight for it. But she faces a tough primary election challenge on Tuesday in Arkansas, and a loss would likely doom her proposal; most analysts expect it to be watered or dropped anyway.
The Lincoln plan is not a part of the House reform bill.
Obama and congressional Democrats want to tighten financial regulation to prevent a recurrence of the 2007-2009 crisis.
Core Obama goals include redirecting much of the swaps market through more accountable channels such as exchanges, electronic trading platforms and clearinghouses.
Another goal is higher capital requirements for banks and financial firms. Until Republican Senator Susan Collins got involved, Congress was on its way to calling for those standards, but leaving the details up to someone else.
A late amendment by Collins to the Senate bill would make the new standards more definite and reflect global efforts to standardize capital calculations. Administration officials are divided on the Collins plan.
Another flashpoint in the conference will be the so-called "Volcker rule" to curb trading by banks with their own money that is not related to customers' needs. Both bills contain language related to the rule first proposed in January by Obama and White House economic adviser Paul Volcker.
The Senate version more specifically endorses the rule and some Democrats support toughening that even further.
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