Banking Reform Fervor Cools -- for Now

Not long after introducing a bill that would have meant sweeping reforms for the banking industry, Senator Christopher Dodd has backed off in the face of opposition from both parties to the scope of his proposal. While no one has been able to get Democrats and Republicans together on what banking reforms are needed, Dodd's proposal did achieve bi-partisan consensus on what they don't want.

While Dodd originally threatened to use the Democratic majority to push his bill through, he now rather meekly has described his proposal as just a "discussion draft."

If banking regulation has slowed, it could give banks a breather they need -- and ultimately even benefit bank customers by taking some of the downward pressure of bank rates. To be sure, some reform of the banking industry is called for -- especially measures which would insulate conservative deposits like CDs, savings, and money market accounts from speculative investment activities. Still, much of this could be accomplished simply by sharper oversight from those already empowered to supervise banking activities -- including the same House and Senate committees that are now formulating regulatory measures.

The risk of layering too much complex regulation on the banks right now is that it raises the cost of doing business. This would ultimately hurt depositors in two ways. It could have a direct impact on savings account rates, money market rates, and CD rates by limiting the amounts banks could afford to offer. At the extreme, higher regulatory costs could also jeopardize the solvency of some banks.

So, there is still room for constructive legislation, but if last week's stalling of Senator Dodd's proposal is the start of a more measured approach to the issue, that would be a form of progress as well.

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