Dodd's Departure a New Twist for Bank Reform
January 11, 2010
| MoneyRates.com Senior Financial Analyst, CFA
The decision by Senate Banking Committee Chairman Christopher Dodd not to pursue re-election was an unexpected development which puts yet another wrinkle in the path toward new banking legislation. For depositors, it might be a mixed blessing.
Late last year, Senator Dodd proposed sweeping and stringent banking legislation. It was quickly apparent that he had over-reached, as widespread objections prompted him to back off from his original course. Even so, he established himself as an influence for meaningful banking reform as the discussion of legislation continued.
With Dodd now preparing to leave the stage, will this slow the momentum of banking reform? Some observers think the opposite. Their theory is that without the distraction of running for office, Dodd will be free to pursue banking reform single-mindedly, and without making compromises out of concern for a campaign. On the other hand, the reality of power politics is that anyone getting set to relinquish a post as significant as Senate Banking Committee Chairman is going to see his influence decline sharply in his last months in the Senate.
What this means for bank depositors is also something of a question right now. Actually, that uncertainty is indicative of the tightrope that legislators face when contemplating bank reform. On the one hand, strengthening the stability of the banking system would be welcomed for making deposits safer. On the other hand, overly burdensome legislation would put the kind of squeeze on profitability that would ultimately keep bank rates such as money market rates, CD rates, and savings account rates down.
The bottom line is that Dodd's decision to leave the Senate seems indicative of the fact that the fervor for ambitious banking legislation seems to be fading.
Richard Barrington
12 January 2010 at 6:13 am
Thanks for the comment. On a micro level, i.e., bank-by-bank, higher CD rates and savings rates are not necessarily a sign of loan demand. However, looking at the industry as a whole, we can generally expect that the more demand for capital rises, the higher we'll see CD and savings rates go.
As for Dodd's motivation, who really knows, but he was awfully well-entrenched in his seat, and rightly or wrongly, he has positioned himself out in front of the populist call for reform, rather than being widely tagged as one of the leaders who was asleep at the switch.
Sam Cass
12 January 2010 at 5:45 am
Profitability is not the issue with cd and savings rates. It's the Fed's 0% rate that is depressing rates. Banks take deposits and lend on a spread, and the starting point for that spread on short term rates is determined by the Fed. Different bank strategies and needs for cash result in some banks offering better deals than others. A highly profitable bank may offer low rates while a money losing bank may offer high rates - as we saw last year with Wachovia, WaMu, etc.
Dodd's departure is also not indicative of fading fervor, but rather the fact that he would lose the election. If anything Main Street is more outraged than ever over the bonuses the banks are paying themselves.
http://www.bestcashcow.com/news/article/sam_cass/banks-asking-for-more-regulation-with-record-bonuses.