Sen. Blanche Lincoln's [D, AR] surprise primary win Tuesday has breathed new life into her financial reform provision to ban banks from getting government assistance for their derivatives and swap trading activities.
The provision, known as Sec. 716, is going to be at the center of the financial reform conference committee that starts today (live feed). It has generally been talked about as forcing banks to "spin off" their derivatives trading activities into separate entities, but that description makes it sound more aggressive than it actually is. This isn't a "break up the banks" provision. The new derivatives entity would still be an affiliate under the same parent company as the bank they were spun off from.
The real effect of Sec. 716 would be to put a firewall between regular commercial banking activities and risky derivatives trading, with banks continuing to have access to government assistance via FDIC insurance and the Fed's discount window on the commercial banking side, but without access to any government assistance for derivatives activities. The idea is to make sure taxpayers aren't liable for banks' risky derivatives trades when they go bad.Read Full Article Comments (2)