Three things we know about the financial crisis: Big banks made reckless bets. They hid their weaknesses. And their regulators failed to recognize or fix those vulnerabilities.
The financial overhaul Congress is finalizing aims to solve those problems. It's designed to tighten bank oversight, improve communication among regulators and close some loopholes.
Here are some questions and answers about how bank oversight would change:
Q: How would the bill improve financial oversight?
A: It would create a council of regulators to identify threats to the system. The council would be led by the Treasury secretary. In addition to watching banks, it would identify other large financial companies that operate with little federal oversight. These include insurers and hedge funds whose failures could threaten the financial system. Those companies would face bank-style regulation by the Federal Reserve. If necessary, the council could close such firms.
Lax oversight of nonbank financial companies explains why American International Group Inc. was able to escape regulators' attention until days before its $182 billion bailout.
The council is intended to fix the patchwork system in which separate agencies monitor different types of banks. It would gather data from across the industry. In theory, that would help the council spot bubbles earlier. And regulators could monitor each other to make sure no agency became too lenient.
Q: What would the bill mean for financial companies?
A: More regulation. The bill is intended to make big banks hold more capital to cushion against loan failures. Before the crisis, regulators let banks risk many times more money than they held in reserve. This made banks more vulnerable.
Financial companies also could face scrutiny from more than one regulator. The new oversight council would monitor the biggest institutions. A new consumer protection authority would regulate any company that provides financial products or services.
One problem with the current system is that regulators focus solely on the banks they oversee — not the system as a whole. That's why AIG was able to take on so many high-risk investments. No regulator was monitoring it. Once the bubble burst, AIG couldn't afford to cover losses on investments it had insured. The government had to pay banks to cancel AIG's obligations.
Banks, too, avoided close oversight. Some bought thrifts just so their regulator would be the Office of Thrift Supervision. That industry-friendly agency oversaw some of the biggest bank failures. Under the overhaul bill, the OTS would be folded into another agency.
Q: What would the bill mean for ordinary people?
A: Fees could rise. Limits on the banks' activities would make them less profitable. Many banks will seek other ways to make money. One option is raising fees on credit cards and checking accounts.
In theory, Americans would face less risk from a financial meltdown. That means less danger for investors, consumers and homeowners. The council is designed to prevent financial crises by spotting bubbles and shutting down risky companies before a crisis erupts.
Q: Where does the bill fall short?
A: Community banks could still choose their federal regulator. And bank oversight still would be split among agencies with disparate rules and standards.
Some provisions are vague, leaving key decisions to future regulatory officials. For example, the bill gives regulators leeway over how much capital banks will hold. Regulators might relax their standards as memories fade and the economy improves.