Five US regulators are voting on the Volcker rule, designed to restrict the finance industry in the wake of the 2008-09 financial collapse.
Named after former Federal Reserve chairman Paul Volcker, it bans banks from using their own profits to invest. It is considered the centrepiece of the 2010 banking reform legislation known as Dodd-Frank.
So far, the Federal Deposit Insurance Corp and the Federal Reserve have both passed the rule. Three other separate regulatory agencies are expected to approve the rule later on Tuesday.
One of those three, the Commodity Futures Trading Commission, cancelled its public meeting because of a snowstorm in Washington, DC, but said it still planned to vote on the measure.
The other two regulators, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, are set to consider the measure in private before voting later in the day.
Although the Volcker rule was passed as part of the Dodd-Frank legislation in 2010, it has faced difficulties in implementation, mostly due to opposition from the banking industry.
Once passed, the measure is expected to take effect in April 2014, although banks have until 21 July 2015 to implement changes.
Long time coming
While the bare bones of the Volcker rule have been known for some time, the specifics of its implementation were unveiled for the first time on Tuesday ahead of the vote.
Stretching to 800 pages, at its core, the rule imposes a strict ban on so-called "proprietary trading", which is when banks use their own profits to make trades.
Although banks had been hoping for a less strict interpretation of the rule, which was first proposed by Paul Volcker to US President Barack Obama in 2010, recent trading debacles, including JP Morgan's "London whale" loss, seemed to have led to a stronger measure.
Banks have argued that the rule is too comprehensive and makes it difficult to distinguish between trades made for profit and those done simply to hedge against risk.
"This is the era of 'big brother' banking, where the fortunes of banks are tied to the government like never before," Credit Agricole banking analyst Mike Mayo told the BBC.
"Big Brother was asleep on the couch before the financial crisis and now Big Brother seeks to micromanage the banks as a means to prevent future crises, [but] how can anyone in mid level management really understand a proprietary trade?"
In addition to banning proprietary trading, the Volcker rule also imposes restrictions on how and when banks invest in hedge funds and private equity.
Profit
Those looking for stricter market regulation cheered the news. "Volcker himself noted that it's time to make banks boring again. And I think that that's actually correct," Dan Alpert of Westwood Capital told the BBC.
Although banks have been preparing for some time, the stricter-than-expected rules could still hurt profits in the near term.
Proprietary trading was once a big profit generator for banks, and a Standard & Poor's analysis found that even a significantly weakened rule could cost the big eight US banks $2-3bn a year in foregone earnings.
If a more strict rule is established, it could cost them $8-$10bn a year. It could also further damage Wall Street's ability to compete with overseas markets, unless similar rules are adopted around the globe.
"It will make US banks safer, if the rest of the world goes along with it, then I think it'll make the banking industry safer, but the interlocking aspects of international banking trade are very, very much a threat," said Mr Alpert.
Although individual banks are not expected to sue to stop the implementation of the Volcker rule, some analysts expect that industry groups, such as the US Chamber of Commerce, might engage in litigation to block the measure.
bbc.co.uk
Named after former Federal Reserve chairman Paul Volcker, it bans banks from using their own profits to invest. It is considered the centrepiece of the 2010 banking reform legislation known as Dodd-Frank.
So far, the Federal Deposit Insurance Corp and the Federal Reserve have both passed the rule. Three other separate regulatory agencies are expected to approve the rule later on Tuesday.
One of those three, the Commodity Futures Trading Commission, cancelled its public meeting because of a snowstorm in Washington, DC, but said it still planned to vote on the measure.
The other two regulators, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, are set to consider the measure in private before voting later in the day.
Although the Volcker rule was passed as part of the Dodd-Frank legislation in 2010, it has faced difficulties in implementation, mostly due to opposition from the banking industry.
Once passed, the measure is expected to take effect in April 2014, although banks have until 21 July 2015 to implement changes.
Long time coming
While the bare bones of the Volcker rule have been known for some time, the specifics of its implementation were unveiled for the first time on Tuesday ahead of the vote.
Stretching to 800 pages, at its core, the rule imposes a strict ban on so-called "proprietary trading", which is when banks use their own profits to make trades.
Although banks had been hoping for a less strict interpretation of the rule, which was first proposed by Paul Volcker to US President Barack Obama in 2010, recent trading debacles, including JP Morgan's "London whale" loss, seemed to have led to a stronger measure.
Banks have argued that the rule is too comprehensive and makes it difficult to distinguish between trades made for profit and those done simply to hedge against risk.
"This is the era of 'big brother' banking, where the fortunes of banks are tied to the government like never before," Credit Agricole banking analyst Mike Mayo told the BBC.
"Big Brother was asleep on the couch before the financial crisis and now Big Brother seeks to micromanage the banks as a means to prevent future crises, [but] how can anyone in mid level management really understand a proprietary trade?"
In addition to banning proprietary trading, the Volcker rule also imposes restrictions on how and when banks invest in hedge funds and private equity.
Profit
Those looking for stricter market regulation cheered the news. "Volcker himself noted that it's time to make banks boring again. And I think that that's actually correct," Dan Alpert of Westwood Capital told the BBC.
Although banks have been preparing for some time, the stricter-than-expected rules could still hurt profits in the near term.
Proprietary trading was once a big profit generator for banks, and a Standard & Poor's analysis found that even a significantly weakened rule could cost the big eight US banks $2-3bn a year in foregone earnings.
If a more strict rule is established, it could cost them $8-$10bn a year. It could also further damage Wall Street's ability to compete with overseas markets, unless similar rules are adopted around the globe.
"It will make US banks safer, if the rest of the world goes along with it, then I think it'll make the banking industry safer, but the interlocking aspects of international banking trade are very, very much a threat," said Mr Alpert.
Although individual banks are not expected to sue to stop the implementation of the Volcker rule, some analysts expect that industry groups, such as the US Chamber of Commerce, might engage in litigation to block the measure.
bbc.co.uk
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