Banks vote on Volcker rule
Global banks will today vote on whether to implement the Volcker rule to U.S financial regulations in a bid to prevent risky trading by banks. The Volcker rule is part of the 2010 Dodd-Frank Wall Street reform act that was initiated to prevent a recurrence of the 2008 credit crisis. It is intended to strengthen the national banking system and reduce reliance on taxpayer bailouts to rescue failing investment banks.
The Volcker rule is a direct response to the “London Whale” trading scandal at JP Morgan which cost the bank $6.2 billion.
The “London Whale” is a prime example of risky proprietary trading in which speculative trading bets that are disguised as risk-mitigating hedges. This type of risky trading puts the bank’s financial stability in serious danger.
Under the Volcker rule, banks will be banned from practicing proprietary trading. This includes betting their own money on financial markets as well as owning more than a 3% stake of private equity or hedge funds. The rule is named after Federal Reserve Chairman Paul Volcker who led the proposal for this regulation.
Final details of the Volcker rule will be announced today by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the three U.S. bank regulators. It is expected to be passed the same day, although there has been some contention.
The biggest investment banks will be hit the hardest cost-wise by the rule, potentially losing them billions of dollars in revenues. There is also concern over the rule affecting banks’ profits and making it more difficult to facilitate client trading and hedging against market risks which are exempt.
Many big U.S banks, including Morgan Stanley, Goldman Sachs and Citigroup, have already decreased their proprietary trading activities. How U.S regulators will enforce parts of the Volcker rule that exempts activities “solely outside of the US” remains to be seen and non-U.S banks such as Barclays, UBS, and Deutsche Bank are interested in how this will affect their operations.
Europe and Britain are also preparing to implement rules to restrict proprietary trading. However, ensuring the new rule is compatible with the different regulations of different jurisdictions across Europe is a much bigger challenge.
The deadline for invoking the Volcker rule is currently July 2014, but an extension by the Federal Reserve is expected to make it July 2015.