Key study on implementing Volcker Rule released
The nation's most powerful financial regulators published a new blueprint Tuesday for how they will aim to keep banks from engaging in risky, speculative activity.
In a key step in the implementation of the financial reform legislation signed into law last summer, the Treasury Department and bank regulators approved an 81-page study Tuesday of how to implement the "Volcker Rule," the provision of the legislation that aims to keep banks that benefit from a federal government backstop from undertaking risky trading and other investment activities.
The document calls for "robust" enforcement of the law, first proposed by former Federal Reserve chairman Paul Volcker as a step to try to prevent banks from making irresponsible bets that could ultimately necessitate a federal bailout.
"The regulations should prohibit improper proprietary trading activity using whatever combination of tools and methods are necessary to monitor and enforce compliance with the Volcker Rule," said the report, issued at a meeting of the Financial Stability Oversight Council on Tuesday. The council is meant to be a key policy-making body under the new financial reform law, consisting of the Treasury Secretary and the heads of the Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission and other top financial regulators.
The study emphasizes that regulators will need to be vigilant to keep the institutions they oversee from evading the rules by shifting risky activities around to various arms of their businesses and obfuscating on whether trading in financial markets is done on behalf of clients or with the firms' own money.
Bank CEOs should be required to attest that their firm is honoring the law, the report says, and bank regulators should review trading activity "to distinguish permitted activities from impermissible" and require that banks "implement a mechanism that identifies ... which trades are customer-initiated."
The study was required by the Dodd-Frank act as a key step in turning the concept of the Volcker Rule into specific legislation. The Fed and other bank regulators will still need to proceed with a formal rule-making process to give the ideas embodied in the study the force of law.
| January 18, 2011; 3:43 PM ET
Categories: Federal Deposit Insurance Corp., Federal Reserve, Financial Stability Oversight Council, Regulation, U.S. Treasury
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