Government Ban on High-Risk Bank Trades Set for Approval

Former Fed Chairman Paul Volcker At Senate Banking Hearing
Andrew Harrer/Bloomberg via Getty ImagesFormer Federal Reserve Chairman Paul Volcker.
By MARCY GORDON

WASHINGTON -- U.S. banks will be barred in most cases from trading for their own profit under a federal rule set to be approved Tuesday.

Five U.S. regulatory agencies are voting on the so-called Volcker Rule, a major step toward preventing extreme risk-taking on Wall Street that helped trigger the 2008 financial crisis

Congress instructed regulators to draft the rule under the 2010 financial overhaul law.

The final rule was released early Tuesday before the votes. It is being approved after three years of drafts, debates and lobbying by Wall Street banks.

The restrictions in the final version are stricter than many had expected and are intended to prevent risky trading that required taxpayer-funded bailouts during the crisis. But the rule still provides some exemptions.

The rule seeks to ban banks from almost all proprietary trading. The practice of trading for their own profit has been very lucrative for big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C).
The rule also limits banks' investments in hedge funds.

Still, the rule allows proprietary trading when it is done to facilitate buying and selling investment for customers. That is known as market-making.

Also exempted from the ban will be cases when a bank underwrites a securities offering, and for trading in U.S. government, state and local bonds.

The agencies voting for the rule include the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency.

The largest U.S. banks -- those with $50 billion or more in assets-- will be required to fully comply with the terms of the rule by July 2015.

Other banks will have until 2016 to comply.

The biggest banks will also be required to have compliance programs approved by their boards and senior executives. Banks will have to begin reporting on the status of those programs starting next year.

The banks' CEOs also will have to certify in writing to regulators that the banks have strong processes in place to ensure compliance.

The rule is named after Paul Volcker, a former Fed chairman who was an adviser to President Barack Obama during the financial crisis.

The rule "has the important objective of limiting excessive risk-taking by depository institutions," current Fed Chairman Ben Bernanke said in a statement.

Big banks had reaped huge profits by taking extraordinary risks. But when those trades went bad during the crisis -- especially after a wave of mortgage defaults -- many of these banks were on the verge of collapsing. Most survived only because the government rescued them with taxpayer-funded bailouts.

The big Wall Street banks lobbied strenuously against the Volcker Rule. They argued that the ban could prevent them from market-making on behalf of customers or limiting risks.

Drafting the rule became very complicated. Regulators found it difficult to identify what constitutes proprietary trading in a bank's day-to-day operations.

For example, banks often engage in market-making.

And then there's what's called portfolio hedging. That's when the bank makes trades on its own account to hedge, or offset, the risks of a broad investment portfolio -- as opposed to the risks of individual investments. It can be hard for regulators to distinguish when market-making and portfolio hedging cross over into proprietary trading.


Increase your money and finance knowledge from home

Basics of Diversification

Learn one of the fundamental concepts of building a portfolio.

View Course »

Behavioral Finance

Why do investors make the decisions that they do?

View Course »

Add a Comment

*0 / 3000 Character Maximum

11 Comments

Filter by:
scottee

they are really OLD rules that were changed.

December 10 2013 at 2:45 PM Report abuse rate up rate down Reply
yoursizetoo

It's about time someone did something here to help protect My Money. Banks take our money (taxpayer/personal investments) and knowing i will lose it in a trade they damn well know will fail and they end up with my investment money in the end... they tell me /us "OPPS" sorry that was a bad trade and NOT A DAMN thing can be done to the Bank nor the CEO'S i sure hope they have closed all the hidden loop holes and ect for the BANKS not to WEASEL them selves out of the new law ......

December 10 2013 at 11:25 AM Report abuse +1 rate up rate down Reply
wgm10

The financial crisis began with Government encouraging banks to lower requirements to obtain mortgages tempting people to spend more than they could afford to allow more people to acquire home ownership. Banks and Wall Street took advantage, Government politicians getting involved for political gain from voters, the housing crisis may not have occurred. The Government does not own up to their part of the blame.

December 10 2013 at 11:17 AM Report abuse +1 rate up rate down Reply
1 reply to wgm10's comment
scottee

you are right.
Dodd and Frank are to BLAME.
noticed they jumped ship with their pay and benefits for life.

December 10 2013 at 2:46 PM Report abuse rate up rate down Reply
jgesselberty

It is so easy to take big risks with someone else's money. Bankers, investors and politicians do it all the time.

December 10 2013 at 11:10 AM Report abuse +1 rate up rate down Reply
stengernc

I hope they also add jail time for CEOs and their management team for breaking the laws. Fining them is a joke, it is not their money, let them stew in jail for a few years along with rapists and murders. Americans lost over 4 trillions dollars in value after the last banking fiasco and we still are not out of the woods creating all that fake money to restart the country. None of them served jail time. Steal a loaf of bread and see what the judge does to each of us....it is a joke folks.

December 10 2013 at 7:55 AM Report abuse +4 rate up rate down Reply
1 reply to stengernc's comment
jdsept

Few saw any real breaking as to the 2008 crash but rather poor policy that was not illegal. Any one state att'y general could have taken whatever to court if they wanted.

December 10 2013 at 11:05 AM Report abuse +1 rate up rate down Reply
scottee

prohibits banks from betting on financial markets with their own money. their OWN money? really? this is a day late and a dollar short, as usual.

December 10 2013 at 7:34 AM Report abuse +3 rate up rate down Reply
Tom Harrell

I ain\'t no Stinking Lawyer or Bank Executive but it seems to me that our Troubles started when they repealed the Glass-Steagel act and Passed the Commodities Futures Modernization act a year later.

Why not just DUMP the Commodities Futures Modernizaton act and Re-instate the Glass-Steagel act.

December 10 2013 at 6:55 AM Report abuse +4 rate up rate down Reply
1 reply to Tom Harrell's comment
attyacampbell

Regulations are a necessary evil of a complex modern society. They are the "rules of the road".

December 10 2013 at 8:24 AM Report abuse +3 rate up rate down Reply
k4jlp

Oh crap, what's a good ole bank to do now to make the millions for their CEO's? I guess the consumers will have to come up with it....

December 10 2013 at 6:13 AM Report abuse +2 rate up rate down Reply