On May 12^th, the Senate overwhelmingly passed a bipartisan amendment to its financial reform legislation, restoring supervision of all bank holding companies (BHCs) to the Federal Reserve, and allowing state-chartered Federal Reserve System member banks to choose to continue being supervised by the Fed.  The amendment, introduced by Senators Kay Bailey Hutchison (R-TX) and Amy Klobuchar (D-MN) and co-sponsored by 27 other Senators, passed by a vote of 90 to 9.

“If you look at the crisis, most of the losses that were material for the weak institutions – and the strong, relative to capital – did not come from those [proprietary trading] activities.  They came overwhelmingly from what I think you can describe as classic extensions of credit.”

- Treasury Timothy Secretary Geithner, Sept. 10, 2009

On January 21^st, President Obama announced a proposal that would ban commercial banking companies from engaging in proprietary trading, hedge fund, or private equity activities.  The President called the proposal the “Volcker rule,” after former Federal Reserve Chairman Paul Volcker, who had been advocating such a ban for months.  More recently, Senator Blanche Lincoln (D-AR), Chairman of the Senate Agriculture Committee, successfully passed out of her Committee legislation that would require banking companies to divest of their derivatives trading businesses.  The Lincoln provision was included in the Senate’s regulatory reform bill – “The Restoring American Financial Stability Act” – which passed the Senate last Thursday evening by a vote of 59 to 39.

This week, the most significant foreign delegation in the history of our country will travel to Beijing for the U.S.-China Strategic & Economic Dialogue (S&ED) – a series of high level talks between U.S. Treasury and State Department officials, and their Chinese counterparts.  Given the immense importance of the diplomatic and economic relationships between these two countries, the Engage China Coalition encourages active cooperation and dialogue between the United States and China, which we view as the most constructive means to ensure that the citizens of both nations mutually benefit from the growing bilateral relationship.

Among the amendments to the “Restoring American Financial Stability Act” (S. 3217) that Senators will consider in the coming days is a provision – agreed to by Banking Committee Chairman Chris Dodd (D-CT) and Agriculture Committee Chairwoman Blanche Lincoln (D-AR) – which would require bank holding companies to transfer their derivatives operations out of the banking subsidiary, or potentially out of the consolidated holding company entirely.  This proposal is misguided for a number of important reasons.