By Marcy Gordon
WASHINGTON: Banks will be barred in most cases from trading for their own profit under a federal rule approved Tuesday.
Five U.S. regulatory agencies voted on the so-called “Volcker Rule,” a major step toward preventing extreme risk-taking on Wall Street that helped trigger the 2008 financial crisis.
Congress instructed regulators to draft the rule under the 2010 financial overhaul law.
The rule was approved after three years of drafts, debates and lobbying.
The restrictions in the final version are stricter than many had expected and are intended to prevent risky trading that required taxpayer-funded bailouts during the crisis.
But the rule still provides some exemptions.
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 financial entities called hedge funds.
The rule allows proprietary trading to facilitate buying and selling investment for customers. That is known as market-making.
Also exempted from the ban will be cases when a bank underwrites a securities offering, and for trading in U.S. government, state and local bonds.
The agencies voting for the rule include the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency.
The largest U.S. banks — those with $50 billion or more in assets— will be required to comply by July 2015. Other banks will have until 2016.
The biggest banks will also be required to have compliance programs approved by their boards and senior executives. Banks will report on those programs starting next year.
The banks’ CEOs also will have to certify in writing to regulators that the banks have strong processes in place to ensure compliance.
The rule is named after Paul Volcker, a former Fed chairman who was an adviser to President Barack Obama during the financial crisis.
Drafting the rule became very complicated. Regulators found it difficult to identify what constitutes proprietary trading in a bank’s day-to-day operations.