A day after the Senate passed its version of a sweeping financial overhaul bill, the banking industry fired a warning shot at Washington — and anyone looking to buy a house — that rules restricting banks’ use of derivatives may crimp an already vulnerable housing recovery.
Strongly hinting that average Joes could become collateral damage as a result of Congress’ hard-line approach to regulating banks, Wall Street warned that the cost of home ownership could surge as a result of rules that prevent banks from using a form of derivatives called swaps, which help banks hedge against interest-rate risk and keep a lid on interest rates.
In the current form of the reform bill passed by a 59-39 Senate vote Thursday, banks would be precluded from using the complex derivatives contracts to protect themselves against volatility in their loan portfolios.
The result is that mortgage rates could surge as much as 3.5 percentage points from current rates, which, for a $200,000 mortgage, could result in another $10,000 getting tacked on to the cost of the loan, according to the Securities Industry Financial Markets Association, a bank lobbying group.
“We’re very supportive of the work that has been done to stabilize the financial markets, but this provision to force banks to push out their derivatives operations is a really bad idea that has the unintended consequence of increasing costs for consumers and increasing risks within the banks,” Ken Bentsen, SIFMA’s executive vice president of public policy, told The Post.
To be sure, the smart money in Washington is on the derivatives ban being stripped out of the bill during the reconciliation process with the House version.
Indeed, there is widespread opposition to the measure, with Congress’ two main finreg champions, Senate Finance Committee Chairman Chris Dodd and House Financial Services Chairman Barney Frank opposed to it. In addition, the Obama administration is said to hate the measure, along with Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair.
Still, Wall Street is nervous. “We’ve been lied to before,” said one bank insider.
Other aspects of the reform bill, including a so-called “interchange” amendment, could see consumers slapped with higher fees for using their debit cards because provisions within the current bill prevent banks from charging giant retailers such as Wal-Mart fees for processing debit-card transactions.