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. That's what happened during the 2008 financial crisis.
The Federal Reserve has also approved a draft of the so-called Volcker Rule, named after former Fed Chairman Paul Volcker.
The Securities and Exchange Commission must still 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. It's unclear how strictly the ban will be enforced.
Under the draft, banks must hold investments for more than 60 days. Regulators determined that was enough time to limit speculative trading.
Senior and midlevel 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.
Wall Street banks say the ban on proprietary trading could prevent them from buying and selling investments that their customers might want.
The banking industry said Tuesday the rule is too complex to work and will put U.S. financial firms at a competitive disadvantage to those in other countries.
"How can banks comply with a rule that complicated, and how can regulators effectively administer it in a way that doesn't make it harder for banks to serve their customers and further weaken the broader economy?" Frank Keating, head of the American Bankers Association, said in a statement.
At the same time, several big U.S. banks have already shut down their proprietary trading operations in response to the financial overhaul. Critics say they have merely spread those traders across other desks without ending their risky practices.
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.
by Marcy Gordon Associated Press Oct. 11, 2011 04:34 PM
FDIC backs ban on banks trading for own profit
Reuters: Business News
National Commercial Real Estate News From CoStar Group
Latest stock market news from Wall Street - CNNMoney.com
- ► 2016 (145)
- ► 2015 (146)
- ► 2014 (102)
- ► 2013 (395)
- ► 2012 (392)
- Reagor: Revised program targets underwater homeown...
- Economists warn housing prices will lose more grou...
- Pending home sales fell 4.6% in Sept.
- Scottsdale condo prices up nearly 5% as foreclosur...
- $1.6 billion Prasada project stays on track in Sur...
- Judge approves Chapter 11 for Realty Executives
- Economy picked up over summer
- Scottsdale approves 2nd plan for apartments near a...
- New-home sales up 5.7%, builders slash prices
- Sarkozy Turns to Hu for China Aid as Europe Expand...
- Greece to get 100 bil euros in more rescue loans
- Home prices up in half of major US cities
- Banks score higher in satisfaction survey
- Ad blasts Romney housing comment
- Arizona underwater homeowners to get refinance hel...
- Phoenix homes, part of segregated past, demolished...
- Debt crisis plan is not yet ready
- Massive West Valley development to launch
- Europe's big banks under pressure in crisis
- Developer lays out ideas for dude ranch in Scottsd...
- Combs: Seller isn't absolved in 'as is' sale
- Realtors decry potential loss of mortgage deductio...
- Wall Street Has Worst Quarter Since Crisis in Bank...
- Arizona unemployment rate down in September
- Scottsdale council OKs first plan for apartments n...
- Scottsdale Waterfront rides wave in low tide
- Citigroup to pay $285 mil to settle SEC fraud char...
- Chase's CEO backs a bright outlook
- Origination News - NAR: Lower GSE Loan Limits Alre...
- Perspective: Problem with Housing 2011
- Office-space rent prices decline in Valley
- The new normal: Higher bank fees are here to stay
- Think before switching banks
- Fed: Crisis alters central-bank focus
- Middle-class homeownership dream may be slipping a...
- World population nearing 7 billion
- Mortgage fraud plea involves 40-plus homes
- TDI proposes 667 apartment units for One Scottsdal...
- Phoenix seeks to cancel $97.4 million pact with Ci...
- Myths, misperceptions about credit scores rampant
- EU exec, France want voluntary bank deal on Greece...
- Report: Fewer foreclosures slowed Sept. resales in...
- Fed minutes: 2 policy makers saw need for bolder s...
- Scottsdale Airport Commission rejects apartment pr...
- FDIC backs ban on banks trading for own profit
- Interest in Scottsdale McDowell Corridor redevelop...
- Census numbers detail Arizona's housing bust
- China investment arm buys bank shares to support m...
- Scottsdale entrepreneur thinks inside the box
- European Central Bank offers banks new emergency l...
- Germany, France devise bank plan
- Moody's sees Volcker rule as credit negative for b...
- Windows of time
- Scottsdale-area home prices edge up in 3 areas
- Phoenix-area home prices remain too cheap
- Phoenix-area real estate collapse echoed troubles
- Phoenix-area home price changes vary greatly
- Realty group opens office in Scottsdale
- Gold drops 1 percent after Italy, Spain downgraded...
- Work to start on renovating retail center
- Rush is on to build 3,500 apartments in Scottsdale...
- Mixed-use project coming to Arcadia
- Interest in Scottsdale McDowell Corridor redevelop...
- Maricopa County tops list for home vacancies
- Census: Housing bust worst since Depression
- Phoenix-area bankruptcy filings continue to drop, ...
- Recent data on housing show things looking up
- CBRE Investors pays $53.5 mil for operations hub
- Proposal to shape access to Sonoran Desert
- Sales up 20% at Scottsdale's Windgate Ranch
- Home prices up for 4th month
- Seattle investors buy W. Phoenix apartments
- Ex-leaders of Radical Bunny face SEC grilling
- Arizona trying new ways to assist homeowners
- Moving to downtown Phoenix has saved couple lots o...
- Reagor: Few details on plan for refinancing
- Rental housing becoming less affordable
- Fulton Homes to open 3 new subdivisions | Central ...
- Cross collateralization can trip up borrowers
- IMF vows to tackle Europe debt troubles
- Scottsdale Airpark multifamily housing plans advan...
- Developer leaves Glendale, Scottsdale picking up p...
- Fed plan, fear push 10-year yield to record low, b...
- Seized lands to be placed on auction block
- IMF downgrades its outlook for U.S., Europe
- Agency encourages short sales by offering money
- Doubting value of owning a home
- ▼ October (87)