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 Under the proposal, large financial firms would need to
demonstrate to regulators that they can be managed effectively, with
appropriate accountability, across all of their activities. If they
fail to do so, regulators would have the power to make them
reorganize, shrink, or break apart.
Such a law would strengthen the government's ability to break up
banks it deems a threat to the financial system.
“It’s not pure size, it’s bad management, excessive risk and things
like that, lack of controls," said Alan Blinder, a Princeton
economist who helped formulate the plans. "Now the truth of the size
question is that the bigger you get the harder it is to do those
things effectively.”
Clinton has been under pressure to join progressives within the
Democratic Party calling for the government to break up banks deemed
"too-big-to-fail." Both U.S. Senator Elizabeth Warren, the party's
most outspoken critic of Wall Street, and U.S. Senator Bernie
Sanders, Clinton's leading challenger for the Democratic nomination,
have embraced such an approach.
 Though the risk-based approach offered by Clinton is more nuanced,
it is the centerpiece of a host of financial proposals that hew to
the liberal wing of the Democratic Party. Clinton has moved to
pacify left-leaning critics in other ways too lately, opposing a
controversial Asian trade deal, a tax on certain health plans and a
proposed Canadian oil pipeline.
Other aspects of Clinton's plan include charging banks and other
institutions with more than $50 billion in assets a yearly,
sliding-scale, "risk fee" based on their liabilities.
The measure would affect the country's biggest banks, including
JPMorgan Chase & Co <JPM.N>, Goldman Sachs Group Inc <GS.N> and Bank
of America Corp <BAC.N>, as well as smaller regional banks such as
U.S. Bancorp <USB.N> and SunTrust Banks Inc <STI.N>.
Clinton also called for raising the fines that regulators could
impose on corporations and their executives, and imposing a new tax
on high-frequency trading (HFT).
"These sound like much more meaningful reforms than some of the
things she has suggested earlier," said former Federal Deposit
Insurance Corp Chair Sheila Bair, currently president of Washington
College, in Chestertown, Maryland.
Clinton's HFT tax would target securities transactions with
excessive levels of order cancellations, which her campaign said
unnecessarily burden markets and enable unfair and abusive trading
strategies.
Trading in the mostly automated stock, foreign exchange, and
government bond markets happens at nearly light speed and much of it
involves investors using algorithms to hedge between asset classes.
As prices move, existing orders are canceled or updated nearly
instantaneously.
Updating prices is an essential as it leads to more accurate prices,
capital formation and risk transfer, said Matt Andresen, co-chief
executive officer of HFT firm Headlands Technology.
Andresen said while he does not agree with the HFT tax, he thinks
Clinton has nuanced understanding of the financial crisis that has
in the past landed her in hot water with party loyalists who expect
bold statements.
"It's best not to get oneself in too much of a twist over
presidential primary rhetoric," Andresen of the likelihood that the
plan would come to fruition.
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SHIFTING LEFT
Clinton has been considered the front runner for the Democratic
nomination for the presidential election in November 2016 since she
entered the race.
But Sanders, a self-proclaimed Democratic socialist from Vermont,
has been closing in on Clinton in polls in crucial early-voting
states and in some cases overtaking her. His rise is emblematic of a
leftward shift by party members exasperated by its past coziness
with Wall Street.
"One year ago, who was predicting that all top Democratic candidates
would be talking about jailing Wall Street bankers, breaking up Too
Big To Fail banks, and picking executive branch appointees who will
crack down on Wall Street," Adam Green, co-founder of the
Progressive Change Campaign Committee, which has pushed for tougher
regulations, said in a statement.
Clinton would also pursue additional oversight of the
"shadow-banking" sector by imposing limits on risky short-term
borrowing; review recent regulatory changes to the money market fund
industry for possible holes; create new reporting requirements for
hedge funds and private equity firms; and strengthen the authority
of the Financial Stability Oversight Council.
Clinton's reforms would build on the 2010 Dodd-Frank Wall Street
Reform and Consumer Protection Act, said the bill's co-author,
retired Massachusetts congressman Barney Frank, who also advised
Clinton on the plan.
"Politically, its very important for us to get off the situation
where we're defending what we did, and get the conversation to where
we're building on it," he said.
Overall, Clinton's reforms would represent significant changes to
the financial system if implemented, said James Cox, a law professor
at Duke University.
But the bulk of the measures require changes in the law and powerful
business lobby groups like the Chamber of Commerce may be able to
kill them, while efforts to hold executives more accountable or to
take away some of their pay would be met by fierce resistance.
In a note to clients, Keefe, Bruyette & Woods assured them that the
likelihood of the bulk of Clinton’s proposals becoming law is low,
given that Democrats would have to secure majorities in the U.S.
Senate and House of Representatives, even if Clinton is elected.
(Additional reporting by Ross Kerber, Sarah Lynch, Dan Freed, David
Henry, Olivia Oran and Luciana Lopez; editing by Jeffrey Benkoe and
Christian Plumb)
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