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New Bank Legislation May Affect Bank Rates

April 07, 2010

By Andrew Freiburghouse | Money Rates Columnist

The new 1,200 page long bank reform bill now passing through Congress is not in its final form quite yet, but is definitely shaping up to have a major impact on the banking system, including, possibly, the rates bank pay on money market accounts, savings accounts, and CDs.

Different interest groups view this bill through the prism of their own desires. For example, consumer advocate groups are upset because the consumer protection agency created by this bill would be housed as part of the Federal Reserve infrastructure.

From the perspective of a bank rate watcher, what does this new bill mean?

Too Big to Fail Institutions Will Be Closely Watched

One major aspect of the impending bank legislation is the effort to deal with "too big to fail" financial institutions. Notably, these too big players are not always banks--some are insurance companies (AIG).

The new bill, sponsored by Senator Christopher Dodd, it appears, addresses these concerns by inflicting stricter oversight upon financial institutions whose assets exceed $50 billion. As of now, about 35 companies meet that standard, including Bank of America, JPMorgan Chase, Citigroup, and Goldman Sachs.

If any of the companies on the watch list are deemed in danger of failing, they would be seized by the federal government. Furthermore, the new regulation would more strictly regulate the trading of over-the-counter derivatives. These contracts, of course, were a major cause of the banking crisis of 2008.

Will Safer Banks Mean Higher Rates?

The main thrust of the bill may be to make bank deposits safer. But do safer banks mean higher bank rates? Perhaps. Or perhaps not.

Only time may tell if this new law helps spur higher interest rates on bank deposits.

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