Seven Key Takeaways from Obama's Budget

WASHINGTON — President Obama unveiled his long awaited budget plan on Wednesday, offering a more detailed look at the financial health of the Federal Housing Administration and promoting several key banking proposals.

More than five years after the financial crisis, the banking industry is no longer at the forefront of the Obama administration's agenda. That's reflected in Wednesday's budget proposal, which largely focuses on fiscal issues and would cut the deficit by $1.8 trillion over the next decade.

Still, the budget includes several industry tax reforms and increases spending for several agencies. Following are the key parts of the budget proposal:

FHA might need roughly $1 billion to shore up its capital reserves
Obama's budget blueprint estimates that the Federal Housing Administration will likely require $943 million in additional funding from the Treasury Department to shore up its capital reserves later this year.

The FHA has been struggling to meet its capital requirement for some time due to losses during the financial crisis, and it could be facing its first bailout in the agency's 79-year history. The agency has until the end of the fiscal year, Sept. 30, to decide whether it needs to accept the funds.

The threat of a bailout in the budget proposal, meanwhile, could potentially galvanize Congress into passing needed agency reforms. Lawmakers in the House and Senate have held numerous hearings examining the agency's problems and mission.

The budget release represents "another catalyst to spur legislation on the Hill," said Edward Mills, a policy analyst at FBR Capital Markets, though there's still considerable disagreement among lawmakers about what the scope of that legislation should be.

It's possible that congressional reform, if successful, could prove fairly narrow, said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.

"The immediate reaction is that this budget is not going to be as much of a driver for sweeping FHA reform, and instead I'm looking for it to at most be a catalyst for a very tailored bill out of Congress giving the FHA more latitude to administer its reverse mortgage program," Boltansky said.

Derivatives tax reform could be near
Obama has endorsed a plan that would require certain derivatives contracts to be "marked to market," with gains and losses taxed annually as ordinary income. The proposal is similar to one previously unveiled by Rep. David Camp, R-Mich., chairman of the House Ways and Means Committee. It's possible that bipartisan agreement on the issue could pave the way for reform of the derivatives tax code going forward. The White House estimates that the change would save $19 billion over the next 10 years.

The SEC and CFTC are still hurting for funds
The Obama administration's blueprint significantly increases the budgets for the Securities and Exchange Commission and the Commodity Futures Trading Commission. Both agencies have been struggling to implement key provisions of the Dodd-Frank reform law, including new derivatives rules, in part due to budget constraints.

The budget proposal would raise the SEC's budget to $1.674 billion, a 27% gain over 2012 enacted levels. The CFTC, meanwhile, would receive $315 million, a 54% increase over current spending levels.

The White House also reiterated that it would support legislation authorizing the CFTC to collect user fees to fund its activities, noting that "such legislation would bring the CFTC into line with other federal financial regulators, which are funded in whole or in part through user fees."

The budget projects a drop in FDIC reserves
As it has in the past, the budget predicted the Deposit Insurance Fund will decline as failures and receivership costs increase in the short term. The budget projected that the reserve ratio will fall to 22 cents for every $100 in insured deposits, a significant decrease from the 0.45% ratio it held at the end of the year.

The prediction doesn't track with the Federal Deposit Insurance Corp.'s own published estimates or current failure rates, which have slowed dramatically since last year. The FDIC is expected to provide an update on the state of the DIF on Thursday.

Moreover, the budget's record on this is pretty poor. Last year, it projected the DIF would actually go bankrupt again, dipping below zero before recovering. That never happened. In the past, the budget has made dramatic predictions about failure rates and premium hikes that never come to pass.

A controversial bank tax is still on the agenda
The Obama administration's so-called bank tax would bring in more than $59 billion from the nation's largest banks over the next decade, down about $2 billion from last year's budget blueprint.

The "financial crisis responsibility fee" would levy a tax of 17 basis points on institutions with at least $50 billion in assets, and it's intended "to recoup the costs of the [Troubled Asset Relief Program] as well as discourage excessive risk-taking," according to budget documents.

The fee has been vigorously opposed by the industry and many Republicans since it was proposed in 2010, making it increasingly less likely that it will ever be enacted as we move further away from the crisis.

SBA faces cuts thanks to a stronger economy
Obama's 2014 budget plan would cut spending at the Small Business Administration to $810 million, down $109 million from 2012 enacted levels, citing "the improving economic forecast and lower estimated loan defaults."

The proposal would also waive fees for loans of less than $150,000 in the agency's popular 7(a) business loan guarantee program, in order to "promote lending to small businesses that face the most constraints on credit access."

There are no more details on GSE Reform
The budget once again touts the need for reform of the government-sponsored enterprises, referencing the Obama administration's two-year old white paper on the subject. Yet it does not move the ball forward in any way, instead saying that the "administration and Congress continue to evaluate long-term housing finance reform," a statement that appears at odds with policymakers' actual attention to this issue, which has been minimal to nonexistent.

Then-Treasury Secretary Tim Geithner pledged more details on a concrete GSE plan last spring, but the administration has yet to produce any.