CBO: House financial regulation reform bill would increase deficit by $19.7B

Paul Conner Executive Editor
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The House financial regulation reform bill that recently passed the Senate would increase the budget deficits by $19.7 billion over the 2011-2020 period if enacted unchanged, according to a cost estimate released Wednesday by the Congressional Budget Office.

The bill, passed May 20, has moved to a bicameral conference to be reconciled with the Senate version of the regulation bill. A May 3 estimate released by the non-partisan CBO predicted that the Senate bill would decrease the federal deficit by $19.5 billion over 2011-2020.

If implemented as-is, the House bill is expected to increase revenues by $33.5 billion and increase direct spending by $53.5 billion over 2011-2020.

More than 20 lawmakers from both sides of the aisle will convene today for a conference to hash out the differences in the two bills. The White House has pressed for the committee to find a resolution before the president leaves for the G-20 summit in Toronto on June 24.

The drastic cost difference between the two bills is in the provision that would give the Federal Deposit Insurance Corporation the power to liquidate failing financial firms that could pose a potential threat to the U.S. economy.

Both bills give the FDIC liquidation power, but the Senate version allows the FDIC to assess fees to establish a fund for liquidation. The House version does not allow the FDIC to do so, thus the cost would jump by $37.9 billion.

“Orderly liquidation” is by far the most costly of the new provisions in the House bill. It would increase the budget deficit by $20.3 billion over 2011-2020. The next most costly provision is the creation of the Bureau of Consumer Financial Protection, which would increase the deficit by $3.2 billion over the same period.

The provision to give more regulation power to the Securities and Exchange Commission would decrease the deficit by nearly $5 billion. The bill must follow pay-as-you-go procedures because it affects direct spending and revenues.

“The problem is that the impact goes far beyond the budget,” said David C. John, senior research fellow in financial markets at the Heritage Foundation. “The taxpayers take the real hit because the availability of financial services will fall, and the cost will go higher.”

The Senate bill will likely face a tougher vetting process since it comes down harder on the derivatives trade, the speculative trade that bets on the future demands and prices of services. Wall Street is lobbying hard against derivatives regulation that they say would cost them hugely.

The Senate bill, backed hard by Sen. Blanche Lincoln, Arkansas Democrat, would require financial firms to keep the derivatives trade separate from the insured deposits that everyday people make. With Lincoln winning the primary against challenger Bill Halter, she will have new momentum to defend her provisions.

“The expectation is that the derivatives rules will be diluted,” John said. “The sad thing is that they are based on economic theories that are only faintly tied to reality.”

President Obama has said that he would like to have a law that he could sign by July 4.

Senate Republicans pushed back against the deadline in a May 27 letter, saying, “The conference’s work is too important to be bound by artificial deadlines.”