Reducing or displacing bank risk?

Lisa & Ian Murray seamus at
Wed Oct 25 16:34:05 PDT 2000

full article

The bill is at

House OKs Bill To Reduce Bank Risk

WASHINGTON (AP) _ The House passed a bill on Tuesday designed to reduce risk to the nation's banking system should a major financial institution become insolvent.

The measure, supported by the Clinton administration, passed by a voice vote.

The legislation would allow a bank or investment firm in bankruptcy-court protection and its creditors to separate out the company's losses from derivatives trading, rather than have the trading contracts tied up in bankruptcy proceedings.

Treasury Secretary Lawrence Summers, representing the administration, and Federal Reserve Chairman Alan Greenspan last Friday urged lawmakers to approve the legislation before Congress adjourns soon for the year.

The Senate has yet to act on a similar measure.

Derivatives are complex financial instruments whose value depends on the value or change in value of an underlying security, commodity or asset. Businesses use them to guard against losses from unexpected market movements. Speculators and investment funds trade them as high-risk bets, hoping for huge returns.

``We believe that this is a rare opportunity for government to take an important, tangible step to mitigate systemic risk and improve the integrity of our financial system,'' Summers and Greenspan wrote in letters to House and Senate leaders.

The measure adopted Tuesday also is included as a provision in broader legislation rewriting the bankruptcy laws, passed by the House on Oct. 12, that President Clinton has said he will veto. Because of the veto promise, Summers and Greenspan had urged the leaders to adopt the provision as a stand-alone bill.

``It would reduce the likelihood that incidents such as the near-collapse of Long-Term Capital Management in September 1998 would pose a broader threat to our financial system,'' they wrote.

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