Make us your home page
Instagram

FDIC backs draft Volcker Rule to ban proprietary trading by banks

WASHINGTON — Banks would be barred from trading for their own profit instead of their clients' under a rule federal regulators proposed Tuesday.

The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote. The ban on so-called proprietary trading was required under the financial overhaul law.

For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out, as happened during the 2008 financial crisis.

The Federal Reserve also has approved a draft of the so-called Volcker Rule, named after former Fed Chairman Paul Volcker.

The Securities and Exchange Commission still must vote on it, and then the public has until Jan. 13 to comment. The rule is expected to take effect next year after a final vote by all three regulators.

A ban on proprietary trading could help President Barack Obama in next year's election by showing he has adopted tough rules to rein in risky trading on Wall Street.

A harder line with bankers might also help Obama win over protesters on Wall Street. Many believe Obama was too lenient on the banks because he continued the bailouts that had begun under President George W. Bush.

Congress and Obama had hoped the Volcker Rule would blunt such criticism. But they left most of the details for regulators to sort out.

Under the draft, banks must hold investments for more than 60 days. Regulators determined that was enough time to limit speculative trading.

Senior and mid-level managers would be required to make sure bank employees comply with the restrictions. But the rule doesn't say what happens if they don't.

Traders should not be paid in a manner that encourages risk-taking, but the rule doesn't outline what that entails.

Critics contend that the rule as written is too vague and its effect on risk-taking will be limited. Banks have a history of working around rules and exploiting loopholes. In this case, banks can make most trades simply by arguing that the trade offsets another risk that the bank bet on.

The draft rule "draws too few bright lines to make clear what banks can and cannot do," said Bartlett Naylor, financial policy advocate at the liberal group Public Citizen. "The regulators are proposing that they will detect the difference between various trades by fishing through complex data provided by the banks after the fact. This is an invitation for evasion."

The rule was proposed by the Fed. Some critics argue the Fed often capitulates when bankers complain that regulations make it harder for them to do business.

The rule also would limit banks' investments in hedge funds and private equity funds, which are lightly regulated investment pools. Banks wouldn't be allowed to own more than 3 percent of such a fund. In addition, a bank's investments in such a fund couldn't exceed 3 percent of its capital.

Before Congress passed the financial regulatory overhaul, banks had no limit on how much of those funds they could own. Still, typically on Wall Street, such investments already fall below the 3 percent threshold.

Banks could still put their clients' money into those funds. They will still be able to manage such funds, and collect fees and a percentage of trading profits.

FDIC backs draft Volcker Rule to ban proprietary trading by banks 10/11/11 [Last modified: Tuesday, October 11, 2011 9:56pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Last orca calf born in captivity at a SeaWorld park dies

    Tourism

    ORLANDO — The last killer whale born in captivity under SeaWorld's former orca-breeding program died Monday at the company's San Antonio, Texas, park, SeaWorld said.

    Thet orca Takara helps guide her newborn, Kyara, to the water's surface at SeaWorld San Antonio in San Antonio, Texas, in April. Kyara was the final killer whale born under SeaWorld's former orca-breeding program. The Orlando-based company says 3-month-old Kyara died Monday. [Chris Gotshall/SeaWorld Parks & Entertainment via AP]
  2. Miami woman, 74, admits to voter fraud. Does jail await, or will she go free?

    State Roundup

    MIAMI — An 74-year-old woman pleaded guilty Monday to filling out other people's mail-in ballots while working at Miami-Dade's elections department.

    Gladys Coego
  3. Bigger ships carry Georgia ports to record cargo volumes

    Economic Development

    SAVANNAH, Ga. — Bigger ships arriving through an expanded Panama Canal pushed cargo volumes at Georgia's seaports to record levels in fiscal 2017, the Georgia Ports Authority announced Monday.

    The Port of Savannah moved a record 3.85 million container units in fiscal 2017, the state said, benefiting from the larger ships that can now pass through an expanded Panama Canal.
  4. Dragon ride in Harry Potter section of Universal closing for new themed ride

    Florida

    Universal Orlando announced Monday that it will close Dragon Challenge for a new "highly themed" Harry Potter ride to open in 2019 — sending wizard fans into a guessing game with hopes for a Floo Powder Network or the maze from the Triwizard Tournament.

    Universal Orlando announced Monday that it will close Dragon Challenge on Sept. 5 for a new "highly themed" Harry Potter ride to open in 2019. The ride, originally the Dueling Dragons roller coaster, was renamed and incorporated into the Wizarding World of Harry Potter when the hugely popular area opened in 2010.
  5. Would you let your company implant a chip in you?

    Working Life

    Would you ask an employee to get a chip implanted in her hand? Sounds invasive and intrusive. But come Aug. 1, one company in Wisconsin will be giving it a try.

    Three Square Market - a developer of software used in vending machines - is offering all of its employees the option to get a microchip implanted between the thumb and forefinger. [Photo from video]