How Volcker Rule would limit banks’ risky bets
Q: What was the banks' argument?
A: They contended that a ban on proprietary trading could bar them from legitimate market-making on behalf of customers and from appropriately limiting their risks by hedging broader portfolios.
Q: But the final rule doesn't include such an exemption for "portfolio hedging." Why not?
A: An event in 2012 may have led regulators to rethink such an exemption. JPMorgan traders in London made huge trades on derivatives with the bank's money — an ill-conceived bet that cost the bank $6 billion. When the losses came to light, they damaged the bank's reputation. Experts believe the "London Whale" trades, as they became known, helped speed momentum toward a stricter rule. In its latest form, the rule does not exempt portfolio hedging.
Q: So did the banks end up losing on the rule?
A: Their lobbyists are "hugely influential" in crafting regulations, says Cornelius Hurley, a former counsel to the Federal Reserve who heads Boston University's Center for Finance, Law and Policy. "But they don't win every battle."
Q: Will the rule succeed?
A: Hard to know for sure. The final rule requires CEOs of major banks to personally certify once a year that their firms have strong compliance programs. Some big banks have already closed their proprietary trading operations in anticipation of the rule. Still, the rule won't take effect for the biggest banks until mid-2015 and not until 2016 for big banks below the top tier. Its complexity could make enforcement difficult.
"It's all in the details," says James Cox, a Duke University expert on financial regulation. "The longer it gets, the more holes it's got."