Regulators unveil final ‘Volcker Rule’ to curb bank risk-taking

WASHINGTON -- Federal regulators on Tuesday unveiled the final version of a rule designed to prevent federally insured banks from engaging in risky trading of stocks and securities, moving to put in place a key regulation called for in the 2010 financial regulatory overhaul.

The so-called Volcker Rule would stop banks from using their own money to trade for profit, or what’s known as proprietary trading, and limits their ability to own or invest in hedge funds and private equity funds.

However, the final version of the rule, set to be approved Tuesday, would allow banks to continue making trades to offset specific risks in their investment portfolios. The rule also would allow banks to buy and sell securities for their clients, an important financial system practice called market-making.

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“Overall, the rule is expected to put pressure on banks’ trading revenue, but it gives the industry regulatory clarity,” FBR Capital Markets said in a research note.

Officials from five financial regulatory agencies have struggled to shape the final rule, which was supposed to be finished in mid-2012. Banks have lobbied hard to limit the rule’s scope since regulators released proposed regulations in October 2011.

The rule is named after former Federal Reserve Chairman Paul Volcker, who championed its creation, and it was an important component of the Dodd-Frank Wall Street reform law passed in response to the financial crisis.

The agencies that drafted the rule are the Federal Deposit Insurance Corp., the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

All those agencies were set to approve the rule on Tuesday after receiving about 18,000 public comments. The rule is about 70 pages long, preceded by a preamble of about 850 pages.

“Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments,” Fed Chairman Ben S. Bernanke said in remarks prepared for the central bank’s board meeting Tuesday.

Regulators tried to toughen the proposed rule so it would prevent a recurrence of JPMorgan Chase & Co.’s so-called London Whale trades. The 2012 trading debacle involved faulty bets on complex financial derivatives by traders in the bank’s London office, causing $6 billion in losses and triggering a nearly $1-billion regulatory fine.

Fed Governor Daniel Tarullo, who heads the agency’s bank supervision and regulation committee, said in prepared remarks that “the ‘London Whale’ episode allowed staff to test the procedural and substantive requirements of the proposed rule against a real-world example of what should not happen in a banking organization.”

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