US regulators were yesterday to approve a rule to rein in risky trading by banks, a crucial part of their efforts to reform Wall Street and prevent another taxpayer bailout.
The Volcker rule, named after former US Federal Reserve chairman Paul Volcker, who championed the reform, prohibits banks from betting on financial markets with their own money, a practice known as proprietary trading.
The rule, which has now mushroomed into 800 pages, also bars them from owning more than 3 percent of hedge funds or private equity funds.
The final version of the crackdown is expected to be tougher than when it was proposed two years ago, after JPMorgan Chase & Co’s US$6 billion loss last year — nicknamed the London Whale after the bank’s huge positions — highlighted the perils of speculative trading.
Banks worry the rule will erode profits, and make it harder to engage in businesses that are exempt under the law such as hedging against market risks, facilitating client trading — or market-making — and security underwriting.
“The challenge is to prevent the impermissible activities, while promoting the underwriting, the market making, everything that everyone regards as important to financial markets,” Deloitte & Touche partner Robert Maxant said.
The rule is one of the most hotly debated parts of the 2010 Dodd-Frank Wall Street reform act, aimed at preventing the taxpayer bailouts of large investment banks that happened during the 2007 to 2009 credit collapse.
The three US bank regulators, as well as the US Securities and Exchange Commission and the Commodity Futures Trading Commission, were to unveil details of the final rule at 9:30am.
They are then expected to adopt the rule later in the day, although some officials are expected to dissent to the way the rule is crafted.
The rule could cost the largest investment banks billions in revenues, and banks will particularly focus on how strict the requirements are for them to prove that any risky positions they take on are on behalf of clients.
Banks are worried regulators will clip their wings when it comes to entering risky positions to mitigate financial risk arising in their business, so-called risk hedging.
Separately, Europe is seeking to agree by year-end on how to close failing banks, part of an ambitious plan to create a single banking framework and fix broken lenders whose problems have festered since the financial crisis.
The main issues are: Who decides and who pays?
Under pressure to strike a deal before an EU summit next week, eurozone finance ministers tried to resolve differences on the first of two days of talks on Monday.
Despite ministers’ optimism for a deal yesterday, when EU counterparts from outside the eurozone were to join the talks, Germany remained opposed to any scheme that would allow the use of the bloc’s rescue fund.
Creating an agency to close eurozone banks, as well as a fund to pay for the clean-up, would mark a deepening of integration of the 17 nations sharing the euro.
However, it raises complex questions of sovereignty and who will foot the bill.
A banking union, involving a single bank supervisor for the bloc and an “executioner” to close banks, is the most ambitious project launched since the region’s debt crisis and is designed to provide a stronger underpinning to the single currency.
“There’s a chance [of a deal]. It will be a lot of work,” German Finance Minister Wolfgang Schaeuble said.
However, a German official rejected a eurozone proposal that would allow the eurozone’s bailout fund, the European Stability Fund, to lend and help finance the cost of any future bank clean-ups.
Irish Minister of Finance Michael Noonan, arriving in Brussels, said there were still “wide differences,” while Dutch Minister of Finance Jeroen Dijsselbloem, who chairs the gatherings of eurozone ministers, said he was ready to call further meetings next week to reach a deal.
In search of a compromise, ministers from the biggest eurozone economies — Germany, France, Italy and Spain — met in Berlin last week, although details of progress were unclear.