BMO Capital Markets suggests that the proposed U.S. regulatory reform doesn’t do much to address many of the major problems revealed by the financial crisis. Moreover, many of the details have yet to be filled in, by both U.S. and global regulators.

In a special report on the state of the proposed reform of financial regulation in the U.S., BMO points out that the U.S. legislation (which is still awaiting senate approval), does not address many of the problems uncovered by the financial crisis.

“It does not set specific rules, nor does it deal directly with the ‘too big to fail’ issue, the debacle of Fannie Mae and Freddie Mac, or consolidate the overall number of regulators,” BMO says.

Instead of simplifying the cumbersome U.S. regulatory system, the bill creates several new authorities, and only eliminates one, the Office of Thrift Supervision, it notes.

It also doesn’t open the credit ratings business to more competition. “Considering that the ratings agencies were arguably one of the prime enablers of the crisis, this can be seen as a serious failure in the legislation,” BMO says.

Proposed new mortgage rules are the only ones that, had they been in place before the crisis, might have done something to prevent, or at least mitigate, the turmoil, the report suggests. It notes that the bill establishes new, national minimum underwriting standards for home mortgages, and it bans payments to mortgage brokers for steering borrowers to high-priced loans.

“It is shocking that these mortgage regulations were not on the books. Canadian mortgage lenders would never have made loans to people with no documentation, let alone no income or assets,” it says.

“Most people don’t believe this piece of legislation, by itself, is capable of preventing the next financial crisis. There is no leverage rule, and we still don’t have clarity on some key issues, such as the level and definition of required Tier 1 capital, both of which await Basel III,” the report says.

While, the bill “will restrain the activities of banks, especially the largest, and will be costly to implement. The impact on bank earnings is uncertain, but less severe than Wall Street might have feared,” it adds.

Additionally, the report says that the bill “provides a framework” for future regulation, but it notes that the specifics of many of its elements are largely left up to the regulators. “The decisions made in coming months and years by the many regulatory bodies will determine just how effective this legislation will be in preventing a financial crisis in the future,” it says.

“The full effects of the financial overhaul legislation won’t be felt for several years, as new regulations are drafted and implemented,” BMO concludes.

Moreover, it points out that many of the specific decisions on banking regulation could be made by the Basel Committee on Banking Supervision, which has been working to revamp capital and liquidity rules for global banks.

“Even watered-down Basel III proposals could make anything found in the U.S. banking reforms look mild,” BMO says. “Many on Wall Street fear the worst. Even a pared-down version will mean even more regulation—and lower earnings—on top of the new requirements for capital and reduction in risk-taking activities.”

The wait for the latest Basel proposals is also the biggest worry for the domestic banks. “Canada’s banks have been anxious for global authorities to finalize the specifics of capital requirements because holding so much more excess capital relative to other global banks puts them at a competitive disadvantage, limits lending and reduces earnings,” it says, noting that they have also been prohibited from raising dividends or making major investments unless they raise even more capital. “So for them, it’s a waiting game.”

“The G-20 postponed setting specific requirements until at least late November when they meet again in Seoul,” it notes; “in reality, it may take considerably longer.”

IE