This week, a key committee is set to release legislation that finally addresses the issue, according to House aides.
The legislation, from the House Financial Services Committee, would aim to better watch and take over those institutions currently deemed "too big to fail."
The watching over part is called "systemic risk" regulation and the taking over part is called "resolution authority."
Financial experts and economists agree that this part of regulatory reform is among the most critical to preventing the kinds of problems that caused the financial crisis.
Most observers, including those in the financial services industry, agree government officials didn't have the right tools to properly manage the failures of giants Lehman Brothers and American International Group.
"To address the extremely serious problem posed by financial firms perceived as 'too big to fail,' legislative action is needed to create new mechanisms for oversight of the financial system as a whole," said Federal Reserve chairman Ben Bernanke in a speech last week.
0:00/04:39'Break up the banks'Despite the expected movement in the House, it's a preliminary step in a process expected to take months. House leadership has said they hope to have a final vote on all the different parts of regulatory reform before Thanksgiving. Meanwhile, the Senate has yet to release any legislation on the topic, but several senators have talked about ideas that clash with those in the House and the White House.
The Obama's administration proposed legislation on the topic, released this summer, was over 250 pages and proposed a lot of changes. The House version is expected to reflect many of the same ideas with some tweaks. Expect to see:
Stronger, and in some cases, new federal supervision for the largest nonbanking financial firms that previously weren't regulated.Creation of a new oversight council that would look out for major problems at these nonbanking firms.Stronger capital requirements for the largest financial intuitions.New powers to allow government agencies the same kind of ability to take over giant financial firms the way the Federal Deposit Insurace Corporation (FDIC) does over smaller failed banks.One of the trickiest parts is the last one, called resolution authority.
"I think the resolution authority is probably the hardest," said Rep. Barney Frank, chairman of House Financial Services, last Thursday, after his committee passed the new Consumer Financial Protection Agency, which he called the "second hardest."
His concern is the same as many economists and financial experts watching these things: Finding the right balance.
"Finding the balance, so you have effective resolution authority, but without money going to people who shouldn't get it -- without rewarding people who screwed up, that's an intellectually difficult issue that we're making some progress on," Frank said.
There is also a concern about giving government too much authority to pick winners and losers after a failure -- for example, deciding which creditors get paid and how much.
"It's a very useful authority to have, to be able to tell debt holders, you're going to get 80 cents instead of 100 cents.....or turning an insolvent firm into a solvent firm," said Phillip Swagel, an economist and former assistant Treasury Secretary who teaches at Georgetown University. "But the potential for mischief is very high."
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