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STAN HONDA

U.S. lawmakers reached an agreement on the most dramatic reform to the financial system in more than 70 years, altering the landscape for banks, regulators, and consumers for decades to come.

The voluminous legislation aims to prevent a repeat of the 2008 financial crisis by handing new powers to regulators and slapping limits on the ability of banks to take risks.

Lawmakers haggled through the night Thursday in order to have a final version of the bill ready ahead of President Barack Obama's departure for the Group of 20 summit in Toronto Friday morning.

If the bill is approved and signed into law in the coming days as expected, it will mark a sharp break with the freewheeling environment that fostered the crisis, where policy makers favoured fewer rules, not more.



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Now the pendulum has swung hard in the opposite direction. Banks will be faced with a welter of new restrictions, many of which could dent their earnings, though they may also pass some costs on to their customers. They'll also have to contend with stricter capital requirements and will no longer be able to place bets solely for their own account.

The precise impact on the U.S. financial industry is hard to gauge since many of the provisions of the legislation leave key decisions in regulators' hands, choices that will be implemented over the next several years.

But the sheer scope of the reforms, which leave no corner of the financial system untouched, suggest that banks will be less profitable and grow more slowly. Some industry experts argue the changes place U.S. banks at a disadvantage to their global peers - an outcome Mr. Obama will be keen to forestall by urging other leaders at the G20 to implement their own reforms.

"The bottom line is this legislation makes things better," says Harvey Goldschmid, a former commissioner at the U.S. Securities and Exchange Commission. "It also puts an awful lot of the burden on regulators. I hope they're up to the task."

The reforms provide an array of tools to head off a fresh financial crisis. Regulators will have clear authority to seize sinking financial institutions and a road map for unwinding them, something they lacked in the fall of 2008 when Lehman Brothers Inc. and American International Group Inc. headed toward the abyss.

A brand-new agency tasked with guarding consumers from abuses will be born inside the U.S. Federal Reserve Board, with sway over everything from how mortgages are marketed to what's in the fine print of credit-card agreements.

"The notion that we finally have an agency that is devoted specifically to protecting consumers - all by itself, that is a huge achievement," says Barbara Roper, director of investor protection for the Consumer Federation of America.

In another move to fix a glaring defect exposed by the crisis, nearly all derivatives - financial instruments that fluctuate based on the value of an underlying variable - will no longer change hands in private deals between two parties. Instead, they will be routed through clearinghouses and regulated trading platforms, a shift that will increase transparency and competition.

One of the most fiercely fought parts of the bill, not nailed down until the wee hours of Friday morning, was whether banks would be able to keep their units that buy and sell derivatives for customers, including some of the highly complex instruments that sparked the meltdown.

Championed by Arkansas Senator Blanche Lincoln and fiercely opposed by legislators from New York state, the measure ended up in a compromise tilted toward the banks. The vast majority of derivatives will remain where they are inside banks, and only a smaller slice of the business will need to be moved to a separate subsidiary.

When it comes to addressing the causes of the financial crisis, the bill has a notable omission. It offers no prescriptions for the wounded housing giants Fannie Mae and Freddie Mac, now dependent on a lifeline of public funds. The Obama administration has said it intends to address their future in a separate debate.

The bill is on track to be approved by the House and the Senate next week, then signed into law by Mr. Obama before the July 4 holiday. But the process of overhauling the financial system has just begun. "There's going to be a regulatory tsunami that happens after this," says Thomas Quaadman of the U.S. Chamber of Commerce, as officials grapple with translating the legislation into clear rules.

Of course, as those rules are formed, there will be fresh chances for banks to influence the outcome. "There will be a fair amount of jockeying over the next few years," Mr. Goldschmid says. "Some of what Wall Street says will not be worth hearing, and some will have to be considered."

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