A broad new government rule to limit risk-taking by Wall Street will force banks to rethink virtually every aspect of their trading activities, setting the stage for more tumult at the largest U.S. financial institutions.

The so-called Volcker rule, approved by five financial regulatory agencies on Tuesday, could lop as much as $10 billion total in yearly pretax profit from the eight largest U.S. banks through lower revenue and higher compliance costs, according to estimates from Standard & Poor's.

The 953-page edict, part of the 2010 Dodd-Frank financial overhaul, codifies and restricts the way banks trade securities. It curbs banks' ability to bet with their own capital and forces them to draw bright lines separating trades for clients from trades to limit their risks and so-called proprietary bets.

Named for Paul Volcker, the former Federal Reserve chairman, the rule extends the government's reach into Wall Street's most profitable core. Proprietary trading helped fuel the financial-services industry's climb to dizzying heights in the years leading up to the financial crisis—and created millionaires within the biggest banks.

The rule "will help the stability of the broader economy" by restoring trust and confidence in banks, Mr. Volcker told The Wall Street Journal Tuesday.