Wall Street frets as Volcker Rule nears vote

Tim Mullaney | USA TODAY

Five years after the financial crisis, regulators will vote Tuesday on the "Volcker Rule,'' one of the most contested elements of the sweeping, post-crisis Wall Street reform act known as Dodd-Frank.

The rule is expected to bar most trading by banks for their own accounts and profit — so-called "proprietary trading'' — in a bid to protect the financial system and federal deposit insurance from future 2008-like meltdowns. Banks would still be able to do such trading for clients.

The Federal Reserve, Commodity Futures Trading Commission, the Securities and Exchange Commission and other agencies are scheduled to consider the new rule. It is named for former Fed chairman Paul Volcker, a longtime advocate of forcing banks to curtail trading in order to limit the volatility of financial markets.

The Volcker rule has been fought by business interests, who now believe they are likely to lose on many key details. Among them: a bar on buying and selling investments for the bank's own account even when they're used to hedge positions the institutions are allowed to hold, said Anthony Cimino, vice president for government affairs at the Financial Services Roundtable.

The rule is also expected to give banks the burden of proving that any securities they do own are in their portfolios for the few remaining permitted purposes, rather than making regulators prove that the banks intend to break the rules, he said.

Regulators' tough stance heralds a new era and new approach for financial markets, CLSA banking analyst Mike Mayo said.

"The big picture is that this ushers in an era of Big Brother banking,'' with regulators closely monitoring details of top banks' risk-taking, Mayo said. "Big Brother was asleep on the couch before the financial crisis.''

The new policy reflects Congress' decision that the banking system needed to be "de-risked, de-leveraged and to deliver more consistent financial results,'' he said. As part of the same overall effort, bank regulators are boosting capital requirements for banks internationally.

Banks have already curtailed most of their proprietary trading, Mayo said, understanding that new rules are coming. That may limit the financial impact from the rules, though so much remains unknown, the effect is still uncertain, he said.

"I've done this (60 to 80) hours a week for 25 years, and even I have trouble getting my head around where proprietary trading begins and ends,'' said Mayo.

The biggest arguments recently have been about how much trading should be allowed to hedge positions, especially since banks typically have more deposits on hand than they have loans outstanding, with the rest of their assets usually invested in the markets. They also typically own securities as part of legal activities such as executing client trades and making markets, he said.

Liberal-leaning groups such as Better Markets have lobbied for the toughest version of the rule possible, arguing in a Nov. 21 letter to the agencies that allowing too much trading to let banks hedge risks will allow proprietary trading via loopholes. They pointed to JPMorgan Chase's $6 billion-plus loss in the "London Whale" derivatives trade as evidence that trading that banks say is simply a hedge can pose risks to the system. New rules would hurt access to credit far less than another crisis, they said.

"Wall Street and its lawyers are in the loophole creation-and-exploitation business,'' Better Markets' Dennis Kelleher said. "For 100 years, banks have made the same complaints about every regulation. They said it during the Depression, and we grew the biggest middle class in the history of the world.''

Conservative-learning groups such as the U.S. Chamber of Commerce have argued that the rule will force banks to cut back on raising capital for Main Street businesses, reducing investment and job growth. In a 2012 study commissioned by the Chamber. Washington University finance professor Anjan Thakor argued that higher capital requirements can manage systemic risk without major limits on businesses banks can be in.

Top banks will spend millions of dollars complying with the rules, Cimino said.

"We expect to see outlays for both information technology and staff,'' he said. "But it's going to be difficult (to say how much) until we see the final rule.''