Regulators press on with Volcker Rule amid critics

Jan 18, 2012

The following article was published in The Sacramento Bee on January 18, 2012:

Regulators press on with Volcker Rule amid critics

By Marcy Gordon

Federal regulators are moving ahead with a rule that would ban banks from trading for their own profit. But they offered to consider adjustments after lawmakers expressed concerns that restrictions could hurt the economy.

Republican lawmakers and a few Democrats questioned the merits of the so-called Volcker rule at a hearing Wednesday.

The rule was required under the financial overhaul that the Democratic-led Congress passed nearly two years ago. It has been approved in draft form by five government regulators and is expected to be finalized this summer. After that, banks will have until July 2014 to comply.

Regulators hope it will limit the kind of risky trading that hastened the financial crisis and forced taxpayers to bail out the banks.

Republicans and bank industry officials say the ban would send bank business overseas, which would cost jobs.

Democrats have also challenged the rule, saying it is too complex and marred with loopholes. A similar point has been made by Paul Volcker, the former Federal Reserve chairman who initially proposed a simpler concept for ending proprietary trading.

The regulators said they tried to balance the need to restrain risky trading with the goal of keeping financial markets vibrant.

One challenge is that it is hard to determine when a bank is trading for itself or its client. The regulators are proposing to use a test based on the intent or purpose behind trades.

“We’re clearly open to a better idea if there is one out there,” said Fed Gov. Daniel Tarullo.

Rep. Spencer Bachus, R-Ala., chairman of the Financial Services Committee, said that’s too difficult. “When we have to interpret people’s motive, we’re on thin ice.”

The regulators also said they wouldn’t punish banks if their traders unintentionally cross the line between the two kinds of trading.

About 120 House members of both parties have sent a letter to the regulators, who also include Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Martin Gruenberg, asking them to take the proposed rule back to the drawing board.

The rule has been approved in draft form by the Fed, the SEC, the FDIC, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency.