Scenarios: Where is U.S. financial regulation headed into 2011?

(Reuters) – A torrent of new rules for Wall Street and U.S. banks is pouring off Capitol Hill into the federal regulatory agencies, unleashed by the devastating 2008-2009 financial crisis.

The agencies is where the action will be this year and next as regulators, lobbyists and lawmakers struggle to implement the Dodd-Frank financial reforms.

With parallel efforts under way in Europe, Dodd-Frank — enacted on July 21 — is likely to be implemented as written, though banks are lobbying for softening parts of it to protect their profits and business models.

Here’s what lies immediately ahead and a look into 2011:

DEBIT CARD FEES: Dodd-Frank ordered cuts in the fees that banks charge on debit card transactions, but left details unclear, saying fees must be “reasonable and proportional.”

Banks want regulators to define that generously. Bank of America has said that, for its debit card business alone, as much as $2.3 billion in fees is at stake. Card networks such as Visa Inc are concerned, as well.

Analysts project fees could shrink by 50 percent. The Federal Reserve will meet on Thursday to discuss the issue. New final rules from the Fed must be in place by late March.

Aside from tweaking around the edges, the banks will have trouble getting a major rollback here, analysts said.

“It is unlikely that Congress will make any changes to these provisions,” said FBR Capital Markets analyst Ed Mills.

BANK CAPITAL: U.S. banks are thickening their capital cushions due to Dodd-Frank, with a new global pact known as Basel III also driving a broad capital build-up worldwide.

The Federal Deposit Insurance Corp on Tuesday proposed a rule to force bank holding companies to keep the same capital levels as their federally insured bank units. The idea is to keep strong banks from propping up weak holding companies.

The rule, mandated under Dodd-Frank’s controversial Collins amendment, would also apply to non-bank firms that the Fed oversees as “systemically” important” to the economy.

The FDIC will accept public comment on its proposal for 60 days. Basel III will be implemented over several years. Exactly how it will interact with Dodd-Frank is still unclear.

In any case, said MF Global analyst Jaret Seiberg, the new standards “will make it more expensive to be a bank.”

COMMODITY SPECULATION: The Commodity Futures Trading Commission on Thursday will unveil plans to limit speculation in increasingly volatile commodity derivatives markets.

Mega-firms that have stormed into the markets in recent years, such as JPMorgan Chase and Goldman Sachs, make huge profits there and want to keep it that way.

The CFTC wants to set “position limits” on how many derivative contracts a single speculator can hold. The agency’s push for these limits dates back to early 2008, before the financial crisis. Now it is converging with a post-crisis push under Dodd-Frank to rein in off-exchange derivatives markets.

The schedule is tight, with the agency expected to produce new rules by late January. Analysts see a fluid situation.

“We expect some effort to delay implementation of the rules,” said Keefe Bruyette & Woods analyst Brian Gardner.

FANNIE, FREDDIE: When a new Congress convenes in January, Republicans will be in charge of the U.S. House of Representatives and its financial oversight committees.

Analysts expect a lot of noise, but few concrete results, on housing finance and what to do with its crippled, twin giants — Fannie Mae and Freddie Mac.

The Treasury Department is expected to issue a proposal on reforming Fannie and Freddie in January.

“Legislatively this is a 2011 story and could extend past the 2012 elections,” said MF Global analyst Chris Kruger.

NEW FACES: Republican Representative Spencer Bachus will replace his nemesis, Democrat Barney Frank, next month as chairman of the House Financial Services Committee.

In the Senate, Tim Johnson will take the helm of the banking committee from fellow Democrat Christopher Dodd.

Both Bachus and Johnson are more conservative than their predecessors, which some analysts see as a plus for banks.

But both men will assume power in a divided Congress that analysts see as unlikely to legislate on financial regulation beyond a possible Dodd-Frank “technical corrections” bill.

Key appointments lie ahead next year for the Obama administration, which must name new leaders at the FDIC, the Office of the Comptroller of the Currency, and the newly forming Consumer Financial Protection Bureau.

The Senate Banking Committee on Tuesday confirmed Joseph Smith, Obama’s nominee to oversee Fannie Mae and Freddie Mac, paving the way for approval by the full Senate.

Smith is North Carolina banking commissioner and would replace Federal Housing Finance Agency head Edward DeMarco.

(Reporting by Kevin Drawbaugh, Dave Clarke, Christopher Doering, Rachelle Younglai, Corbett Daly; Editing by Richard Chang)

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