Short-term trading of bank accounts would be banned by new rules designed to curb risky speculation by U.S. banks.
Short-term trading of bank assets would be prohibited under a draft of the so-called Volcker Rule released today by a coalition of federal agencies. The proposed regulation would also impose strict limits on hedge fund activities conducted by banks.
The Federal Reserve and the Federal Deposit Insurance Corporation – in cooperation with the Securities and Exchange Commission, the Commodities Futures Trading Commission and the Office of the Comptroller of the Currency – are accepting public comments on the rules and through January 13, 2012.
The long-awaited rule, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, is designed to prevent banks from taking the types of risks that led to the near-collapse of the U.S. banking system in 2008. The proposed regulations would ban banks from short-term trading involving the banks’ own assets and, according to the Federal Reserve, the rules would also severely restrict a bank’s involvement with a hedge fund or private equity fund.
The proposed regulations additionally prohibit banks from any financial activities that would conflict with the interests of bank clients or customers. The Volcker Rule would also ban banks from engaging in any financial activity that exposes the bank to high-risk investments or trading strategies. According to the Federal Reserve, banks would be banned from engaging in activities that threaten the stability of either the bank itself or the greater U.S. economy.
The proposed Volcker Rule exempts transactions involving U.S. debt obligations, government-sponsored enterprises, and federal, state and local agencies. The rules would also allow banks to invest for the purpose of providing liquidity to financial markets, a practice known as “market making.”
Exemptions to the rules would allow banks to own and offer hedge fund and private equity funds under certain conditions, but banks would be required to self-regulate these activities to guard against undue risk, and also monitor and report their activities to federal regulators. The reporting requirements would be less burdensome for smaller, less-complex banking institutions, said the FDIC in a prepared statement released today.
The proposed rules released today are similar to a leaked draft circulated by the American Bankers Association. Proponents of stricter bank regulations say the rules would create a giant loophole by allowing banks to continue with “market making” trades. Members of the financial services industry say that the proposed ban on short-trading of bank assets will deprive banks of a significant source of revenue.
The rule is named for former Federal Reserve Chairman Paul Volcker who became an outspoken critic of the financial services industry while serving as chairman of the Obama administration’s Economic Recovery Advisory Board for two years following the financial crisis.