Efforts to introduce regulatory reform to the U.S. financial industry are grinding on, but there are still a handful of major problems with the proposed legislation, according to IHS Global Insight.

The firm notes that the current Senate bill on regulatory reform would improve oversight of financial stability, help mitigate the problem of institutions that are “too big to fail”, and bring greater regulation to the derivatives market, among other things. But it also sees some significant problems with the bill.

For one, IHS warns that Congressional audits of monetary policy decisions by the U.S. Federal Reserve Board “risks increasing political interference” in monetary policy. IHS also worries that limiting the Fed’s supervisory authority to large banks with assets over US$50 billion, would limit the information that it gets from the supervision of banks, which informs monetary policy.

IHS says that prohibiting banks from engaging in proprietary trading of swaps and derivatives would push this activity would into less regulated markets and traders, “and thus potentially fall below the radar of the new mechanisms for systemic risk monitoring”.

And, it worries about the impact of added regulatory fees on banks’ international competitiveness.

“If Congress can find a way to take the major negatives off the table, then the process has the potential to deliver an effective and powerful set of new financial regulations, mechanisms, and institutions without creating unintended consequences of stifling financial innovation and rendering the U.S. financial system uncompetitive in world financial markets,” it concludes.

IE