The new council of U.S. regulators will face a major test on Tuesday when it unveils recommendations on how to enforce one of the most recognizable, if inscrutable, aspects of the six-month-old Wall Street reform law: the Volcker rule.
The Financial Stability Oversight Council will hold its third meeting on Jan. 18. For the first time, its members will have to say how they believe major aspects of the Dodd-Frank act should be implemented.
The council is expected to release a study recommending how to put into practice a ban on banks trading with their own capital for profit in securities, derivatives and certain other financial instruments — the so-called Volcker rule, named for former Federal Reserve Chairman Paul Volcker.
Banks who hotly oppose the policy, and supporters who contend it is key to preventing another meltdown in the financial markets, are eagerly waiting to see how regulators want to define key aspects of the rule.
Supporters of the rule want regulators to send banks a signal that their lobbying has been for naught.
‘We are looking for them to come out and make it clear to the industry that they didn’t work the refs,” said Dennis Kelleher of consumer group Better Markets.
The council is chaired by Treasury Secretary Timothy Geithner and includes 10 voting members representing major regulators such as the Fed and the Securities and Exchange Commission.
The council also will propose on Tuesday criteria that will be used to determine which nonbanks should be subject to additional scrutiny by the Fed and how a section of law concerning concentration limits should be implemented.
Insurers, mutual funds and hedge funds have been trying to convince the council that they do not pose a risk to the financial system and should therefore escape more regulation.
In addition, the council will receive an update on the mortgage servicing probes being done by several agencies.
Regulators, lawmakers and consumer groups have been calling for new standards after banks including Bank of America and JPMorgan Chase were accused late last year of taking shortcuts in some foreclosure proceedings, such as using “robo-signers” to sign hundreds of unread documents a day.
‘We think that there needs to be some fairly tough corrective measures coming out of that,” Federal Deposit Insurance Corp Chairman Sheila Bair said on Jan. 13 about the investigation by bank regulators that is expected to finish soon.
VOLCKER SPURS SPINOFFS
The complexity and sweep of the Volcker Rule and other items on the agenda will challenge the regulators to prove they can avoid the type of turf fights that have divided them in the past and produce the single regulatory vision imagined by the law.
The council is required to release the study by Jan. 21 but it could choose not to come out swinging and skimp on specifics. The details would then come nine months later when an actual rule is due.
The Volcker rule, which also bans banks from investing in, or sponsoring, hedge funds or private equity funds, has already had an impact. Bank of America, Morgan Stanley, and Goldman Sachs have backed out of or scaled back proprietary trading and private equity businesses in anticipation of its rollout.
J.P. Morgan Securities analysts said earlier this week that among global investment banks, Goldman Sachs likely has the most to lose from the Volcker Rule because many of its competitors, such as Swiss bank UBS AG, are oversees and not subject to the restriction.
Despite the moves made by banks to deal with the rule, regulators’ work will still affect the financial industry in areas such as defining what trades that may look proprietary are permissible because they are being done to aid a client, a move known as market making.
Banks and their lobbyists have warned that too narrow a definition on market making and other permitted trades will restrict credit and ultimately hurt the economy.
“The market making is really where it gets complicated,” said Karen Shaw-Petrou, managing partner at Federal Financial Analytics, a consulting firm.
Consumer groups and lawmakers that support the Volcker provision want regulators to be as specific as possible about what trades are permissible rather than rely on bank examiners to monitor trades on a daily basis using a “you know it when you see it approach” to proprietary trading.
(Additional reporting by Elinor Comlay in New York; Editing by David Gregorio and Tim Dobbyn)
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