- POSTED: 10 Dec 2013 23:22
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New US regulations released on Tuesday place tight controls on banks' trading their own accounts, in an attempt to avoid the high-risk behavior that contributed to the 2008 financial crisis.
WASHINGTON: New US regulations released on Tuesday place tight controls on banks' trading their own accounts, in an attempt to avoid the high-risk behavior that contributed to the 2008 financial crisis.
The long-awaited Volcker Rule, to come into effect on July 21, 2015, also forbids banks from owning hedge funds or so-called covered private equity funds, also with the aim of distancing them from financially risky activities.
Five regulators were expected to approve the rule in a vote on Tuesday, after stiff resistance from banks which complained it would hamper a key source of their profits.
The banks will still be able to engage in some activities that overlap with sheer trading to generate profits, regulators said, acknowledging the frequent overlap.
"The fundamental challenge is to distinguish between proprietary trading, on the one hand, and either market-making or hedging, on the other," said Daniel Tarullo, a governor of the Federal Reserve, the chief author of the rules.
Named after Paul Volcker, a former chairman of the Fed who has advocated tougher controls on banks, the new rule is a key part of the much broader Dodd-Frank legislation crafted after the economic crash to prevent future financial crises.
"This provision of the Dodd-Frank Act has the important objective of limiting excessive risk taking b depository institutions and their affiliates," said current Fed Chairman Ben Bernanke, in a statement ahead of the vote.
"Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to public comments."
The rule will block, for instance, the kind of complex derivative trading strategies that lost JPMorgan Chase some US$6.2 billion in the "London Whale" trading debacle in early 2012.
But it could also mean a drop in income to banks like Goldman Sachs and Morgan Stanley, where the "prop trade" has been an important profit center.
Banks toughly argued against the rule, but have already pulled back their activities in expectation that it will go through.
But industry critics say the rule is not tough enough, and that the US should return to the Depression-era Glass-Steagall Act which created a wall between commercial banking and securities and investment banking businesses.
The two sides were kept separated mainly because the government guaranteed deposits in the banks, and wanted to protect that from risks in the other businesses.
That rule was repealed in 1999 in a push for deregulation, a move which critics said led straight to the financial crisis and the need for the government to rescue dozens of banks.
"The Volcker Rule represents Glass-Steagall-lite. It cannot work because it avoids doing what Glass-Steagall did -- creating a 'bright line' rule separating what was permissible from what was forbidden," said William Black, a former regulator and economics professor at the University of Missouri-Kansas City.
He said the complexity of the rule, 70 pages backed by a preamble of nearly 900 pages, "will be a nightmare for bank examiners and honest banks."
"Yet the big cheating banks will easily evade it by calling their speculation 'hedging,'" he added.