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Volcker rule should be ‘robust’: Oversight Council

Top U.S. financial regulator issues recommendations to implement controls on banks


Regulators should carry out a “robust implementation” of the Volcker rule by forcing banks to wind down or sell trading desks that don’t comply with the law, the U.S. Financial Stability Oversight Council said.

Government agencies should require banks to perform “quantitative analysis to detect potentially impermissible proprietary trading,” the council said in a study released at its meeting in Washington Tuesday. Regulators should also require banks to “implement a mechanism that identifies” which trades are initiated by customers, according to the study.

The Volcker rule, named after former Fed Chairman Paul Volcker, bans banks from risking capital by trading for their own accounts. The rule aims to reduce the chance that banks will make risky investments with their own capital that put their federally insured deposits at risk.

Federal Reserve Chairman Ben S. Bernanke said “a lot more work” needs to be done to implement the rule. “I’m very interested in seeing how the quantitative metrics are developed,” Bernanke said, referring to the criteria that will eventually be adopted to implement the rule. “That will be a challenge certainly as we go forward,” he said at the council meeting.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among Wall Street firms breaking off or winding down proprietary trading units to comply with the rule, a provision of the Dodd- Frank financial overhaul law approved by Congress last year.
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (left) confers with Ben S. Bernanke, chairman of the Federal Reserve, during a meeting of the Financial Stability Oversight Council at the Treasury Department in Washington, D.C., on Tuesday. (Bloomberg)
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (left) confers with Ben S. Bernanke, chairman of the Federal Reserve, during a meeting of the Financial Stability Oversight Council at the Treasury Department in Washington, D.C., on Tuesday. (Bloomberg)

Separately, the council approved a proposed rule for public comment to set criteria for deciding which non-bank financial firms are systemically important and require oversight by the Federal Reserve. The panel also approved a study on so-called concentration limits that looks at how regulators can block financial industry mergers that result in one company gaining too large a market share.

The council said it “strongly supports the robust implementation” of the Volcker rule and recommends that regulators consider requiring banks “to sell or wind down all impermissible proprietary trading desks.”

“It’s still a long way before this gets implemented,” said Ed Mills, a financial regulatory analyst with FBR Capital Markets in Arlington, Virginia. “This study basically starts the clock on the next phase, which is developing the regulations over the next nine months.”

Executives from banks including JPMorgan, Credit Suisse Group AG and General Electric Co.’s GE Capital unit have met with Federal Reserve officials since November to discuss issues such as how the Volcker rule will apply to hedging, according to documents on the central bank’s website.

In a Dec. 17 meeting, David Nason and Stephen Albrecht, former Treasury officials now with GE Capital, met with Fed officials including General Counsel Scott Alvarez to discuss the Volcker rule and systemic-risk designations.

Nason and Albrecht “expressed concern regarding the potential breadth” of the terms “hedge fund” and “private equity fund” in the Volcker rule, according to the website. The GE Capital executives said the regulation “could have unintended consequences” for financing and cash-management subsidiaries, joint ventures and banks’ pension plans.

The oversight council, created by the Dodd-Frank act, is led by Treasury Secretary Timothy F. Geithner and includes the Fed’s Bernanke and the leaders of the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Deposit Insurance Corp. It has broad authority to make companies under its jurisdiction raise capital, increase liquidity and sell assets deemed too concentrated in one segment of the economy.

U.S. bank holding companies with more than $50 billion in assets each ― about 35 in all, including JPMorgan, Goldman Sachs, Bank of America Corp. and Citigroup Inc. ― can automatically be deemed systemically important and subject to Fed oversight.

“We have to be careful to strike the right balance between putting in place new rules that protect consumers and investors and the economy, without stifling the competition and innovation that drives economic growth,” Geithner said at the meeting. He said the council would meet again “relatively soon.” (Bloomberg)
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