Five years after the financial crisis, regulators will vote Tuesday on the "Volcker Rule," one of the most contested elements of the sweeping, post-crisis Wall Street reform act known as Dodd-Frank.
The rule is expected to bar most trading by banks for their own accounts and profit -- "proprietary trading" -- in a bid to protect the financial system and federal deposit insurance from future 2008-like meltdowns. Banks would still be able to do such trading for clients.
The Federal Reserve, Commodity Futures Trading Commission, the Securities and Exchange Commission and other agencies are scheduled to consider the new rule. It is named for former Fed chairman Paul Volcker, a longtime advocate of forcing banks to curtail trading in order to limit the volatility of financial markets.
The Volcker rule has been fought by business interests, who now believe they are likely to lose on many key details.
Among them: a ban on buying and selling investments for the bank's own account even when they're used to hedge positions the institutions are allowed to hold, says Anthony Cimino, vice president for government affairs at the Financial Services Roundtable.
The rule also is expected to give banks the burden of proving that any securities they do own are in their portfolios for the few remaining permitted purposes rather than making regulators prove that the banks intend to break the rules, he says.
Regulators' tough stance heralds a new era and new approach for financial markets, CLSA banking analyst Mike Mayo says.
"The big picture is that this ushers in an era of Big Brother banking," with regulators closely monitoring details of top banks' risk-taking, Mayo says. "Big Brother was asleep on the couch before the financial crisis."
The new policy reflects Congress' decision that the banking system needed to be "de-risked, de-leveraged and to deliver more consistent financial results," he says. As part of the same overall effort, bank regulators are boosting capital requirements for banks internationally.
Banks already have curtailed most of their proprietary trading, Mayo says, understanding that new rules are coming. That may limit the financial impact from the rules, though so much remains unknown, the effect is still uncertain, he said.
"I've done this (60 to 80) hours a week for 25 years, and even I have trouble getting my head around where proprietary trading begins and ends," Mayo says.
The biggest arguments recently have been about how much trading should be allowed to hedge positions, especially since banks typically have more deposits on hand than they have loans outstanding, with the rest of their assets usually invested in the markets. They also typically own securities as part of legal activities such as executing client trades and making markets, he said.
Liberal-leaning groups such as Better Markets have lobbied for the toughest version of the rule possible, arguing in a letter to the agencies Nov. 21 that allowing too much trading to let banks hedge risks will allow proprietary trading via loopholes.
They pointed to JPMorgan Chase's more than $6 billion loss in the "London Whale" derivatives trade as evidence that trading that banks say is simply a hedge can pose risks to the system. New rules would hurt access to credit far less than another crisis, they said.
Conservative-learning groups such as the U.S. Chamber of Commerce have argued that the rule will force banks to cut back on raising capital for Main Street businesses, reducing investment and job growth.
In a 2012 study commissioned by the Chamber, Washington University finance professor Anjan Thakor argued that higher capital requirements can manage systemic risk without major limits on businesses banks can be in.
Top banks will spend millions of dollars complying with the rules, Cimino says.
"We expect to see outlays for both information technology and staff," he says. "But it's going to be difficult (to say how much) until we see the final rule."
Spencer Platt, Getty Images
Copyright 2013 USA TODAY
Original headline: Banks fret as final Volcker Rule nears
Most Popular Stories
- Chinese May Have Spotted Malaysia Airlines Debris
- Why Buffett Bets Big on Green Energy
- Better Pay Means Bigger Profits: Strategist
- 3 Shot Dead in Venezuela Unrest
- Banks Buying Little From Minority Firms: Study
- Several Texas Cities Top Job Search List
- Senate Committee OKs Bill to Sanction Russia
- Wall Street Rally Heads Off 3rd Day of Decline
- G7 Presses Russia to Pull Troops Out of Crimea
- Obama's 'Between Two Ferns' Appearance Has Conservatives Upset