In this March 18, 1980, file photo, Federal Reserve Board Chairman Paul Volcker listens to a question as he appears before the Senate Banking Committee in Washington, D.C. The Federal Reserve and the Federal Deposit Insurance Corp. each unanimously voted to adopt the so-called Volcker Rule, taking a major step toward preventing extreme risk-taking on Wall Street that helped trigger the 2008 financial crisis. The rule which states that U.S. banks will be barred in most cases from trading for their own profit under a federal rule is named after Paul Volcker, a former Fed chairman who was an adviser to President Barack Obama during the financial crisis.
WASHINGTON — U.S. regulators have taken a major step toward reining in high-risk trading on Wall Street, banning the largest banks from trading for their own profit in most cases.
It took three years to write and adopt the Volcker Rule, one of the most critical changes to financial laws in the wake of the 2008 banking crisis.
The Federal Reserve and the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency each voted Tuesday to adopt it.
The final version is stricter than many had expected. Its goal is to reduce the kind of trades that nearly toppled the financial system five years ago and required taxpayer-funded bailouts.
At its heart, the rule seeks to ban banks from almost all proprietary trading. The practice of trading for their own profit has been very lucrative for big banks like JPMorgan Chase, Bank of America and Citigroup. The rule also limits banks’ investments in hedge funds.
But the 920-page rule contains several exemptions that allow banks to continue proprietary trading in some instances. That raises questions about whether the government can completely limit extreme risk-taking in a complex financial world.
Congress instructed regulators to draft the Volcker Rule under the 2010 financial overhaul law. It was a high-priority proposal for President Barack Obama and named after Paul Volcker, a former Fed chairman who was an adviser to Obama during the financial crisis.
On Tuesday, Obama praised regulators for adopting a rule that ensures “big banks can’t make risky bets with their customers’ deposits.”
Regulators won’t begin enforcing the rule until 2015. The largest banks will be required to show next year how they are taking steps toward compliance.
The U.S. Chamber of Commerce on Tuesday said the rule could hurt Main Street businesses by making it harder for them to raise capital as banks’ available cash is reduced. The business lobbying group hinted at a possible court challenge, saying it will “take all options into account as we decide how best to proceed.”
Wall Street banks lobbied fiercely against the rule, arguing it could prevent them from using their own money to control risk in their portfolios.
Banks had also contended that the rule could limit financial trades if it prevents them from using their own money to take the other side of a client’s trade. That’s a practice known as market-making.
The final version of the rule does allow proprietary trading when it is done to facilitate market-making for customers.
Other exemptions include when banks are underwriting a securities offering, or when they are trading in U.S. government, state and local bonds.
Consumer advocates were encouraged by the final language in the rule, which went through several drafts and vigorous public and private debates. But they cautioned that the rule’s implementation is a critical step that will prove whether it has real teeth.
“This is definitely a step forward,” said Bartlett Naylor, financial policy advocate at the liberal group Public Citizen. Still, he said, “It’s really up to (federal) supervisors to enforce it, and that’s a matter of choice.”
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