October 12, 2011
Federal regulators unveiled a 298-page draft Tuesday outlining new rules to prevent big banks from trading for their benefit rather than on behalf of customers, nearly two years after the Obama administration endorsed such a measure.
The “Volcker Rule,” named after former Federal Reserve chairman Paul Volcker, would forbid banks from owning hedge funds and private-equity funds and prohibit them from making certain kinds of trades merely for their profit. It was included in the far-reaching Dodd-Frank financial overhaul legislation passed by Congress last year.
A key motivation behind the rule was to preclude Wall Street banks that benefit from government safety nets, such as deposit insurance, from making certain types of risky trades that benefit only themselves.
Some large banks have begun spinning off or shutting down their proprietary trading units ahead of the expected new regulations. Meanwhile, regulators have acknowledged the fine line they must walk in limiting proprietary trading without curbing acceptable practices, such as firms hedging their risk against swings in currencies or interest rates or trading on behalf of clients.
On Tuesday, the Federal Deposit Insurance Corp. unanimously approved the current version of the Volcker Rule. Several other agencies, including the Securities and Exchange Commission, must vote on the proposal. The Federal Reserve on Tuesday also invited public comment through Jan. 13.
It took almost no time for reactions to start rolling in, from consumer groups eager for the most stringent possible interpretation and industry representatives who argue that the ongoing uncertainty and prospect of regulatory burden created by the Volcker Rule could hamstring banks and make it tougher to serve customers.
The current proposal “is too weighted toward preserving bank freedom of action, rather than creating the changes in bank practice and culture required by the statute,” Lisa Donner, executive director of Americans for Financial Reform, said in a statement. “We strongly urge major improvements in the final rule. The serious and widespread economic pain caused by the failures of our financial system, and the growing expressions of public outrage — with more and more people taking to the streets — help make it clear how important it is to get this right.”
Banking officials were equally unsatisfied, for different reasons.
The current proposal would stifle economic growth and “reduce market liquidity, discourage investment, limit credit availability and increase the cost of capital for companies,” Tim Ryan, president of the Securities Industry and Financial Market Association, said in a statement.
Frank Keating, president of the American Bankers Association, said: “Only in today’s regulatory climate could such a simple idea become so complex. . . . This rule has very real potential to erode banks’ ability to serve their customers, and its hit to diversifying bank income may very well increase — rather than diminish — sources of risk.”
Regulators plan to have the Volcker Rule in place by July 21, the second anniversary of President Obama’s signing the financial regulatory overhaul into law.
Meanwhile, a council of regulators charged with monitoring risks to the nation’s financial stability released new details Tuesday on how it plans to determine which large, non-bank financial firms should be subject to heightened regulation.
Firms eventually deemed “systemically important” would join a handful of the nation’s banks in facing more scrutiny from federal regulators. They also would have to create “living wills,” or detailed plans about how their businesses could be wound down in an orderly manner without wreaking havoc on the economy.