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Rule closes lenders’ profitable business
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US banks will no longer be able to make big trading bets with their own money after regulators finalized a rule shutting down what was a hugely profitable business for Wall Street before the credit crisis.
The measure known as the Volcker rule was a late addition to the 2010 Dodd-Frank Wall Street reform law and seeks to ensure that banks can’t make speculative trades that are so large and risky that they threaten individual firms or the wider financial system.
Banks had hoped to soften the rule, but JPMorgan’s US$6 billion trading loss in 2012, dubbed the “London Whale” because of the huge positions the bank took in credit markets, motivated regulators to devise a tough version.
After more than two years crafting the complex reform, five regulatory agencies on Tuesday signed off on the roughly 900-page rule with new narrower exemptions for legitimate trades.
Former Federal Reserve Chairman Paul Volcker had promoted the curb on proprietary trading as a measure to cut risk, and US officials admitted the final version was not streamlined.
Banks said they were still looking at the details, but did not immediately expect to make further major changes to their operations. Large banks such as Goldman Sachs and Morgan Stanley have already wound down parts of their trading desks ahead of the rule.
But experts said the reform could still erode revenues, depending on how forcefully regulators police banks to make sure they are not trying to mask speculative bets as permissible trades.
“At some point someone is going to have to write up a manual for examiners on what to look for and ... how to enforce that stuff. That’s going to be a really important document,” said Bradley Sabel, a lawyer at Shearman and Sterling.
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