SIDEBAR: What's next? US finance reform leaves many open questions

By Chris Cermak Jul 21, 2010, 17:37 GMT

Washington - Winning approval for the biggest overhaul of Wall Street in generations may have been the easy part. The real challenge lies in the implementation.

President Barack Obama on Wednesday signed a sweeping reform bill that creates new bureaucracies and extends the government's oversight into all corners of the US financial sector. The aim is to correct mistakes that led to a near-collapse of Wall Street in 2008.

The signing ceremony marked the culmination of more than a year's effort to get broad reforms through the US Congress. Yet lawmakers left it to regulators and the Obama administration to fill in many of the blanks.

'The detailed homework in defining, detailing and interpreting the broad regulations is being passed on to the regulators,' said Daniel Kaufmann, an economist with the Brookings Institution. 'They will have enormous latitude and discretion in specifying these regulatory details, and in interpreting them during implementation.'

The government was given broad latitude to make key judgement calls, for example over the level of cash reserves that banks should hold to prevent a future crisis, and what to do with firms that constitute a threat to the wider financial system.

If it chooses, the Federal Reserve can break up banks that have grown 'too-big-to-fail,' though Kaufmann said it is unclear when and if the central bank will have the courage to use that power. The government will also have to decide when to exercise its new-found power to step into a failing financial firm and manage its collapse.

US Treasury Secretary Timothy Geithner will be tasked with setting higher standards for capital and liquidity reserves. This will likely be based on an international agreement - world leaders have promised to set new capital standards by the end of this year.

Geithner will also head a new nine-person council of regulators charged with exposing looming risks to the financial system before they become unmanageable. The actions they take in response could well determine whether the next financial crisis is averted.

Banks, which lobbied hard for many of the reforms to be eased, warned that there remained a great deal of uncertainty, though executives have pledged to work with the Obama administration as it goes about using its new-found powers.

Implementation of this legislation will be challenging for regulators,' said Edward Yingling, president of the American Bankers Association. 'The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean.'