WASHINGTON – Banks would be barred from trading for their own profit instead of their clients’ under a rule federal regulators proposed Tuesday.
The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote. The ban on so-called proprietary trading was required under the financial overhaul law.
Critics on the left dismissed the effort as weak and marred by loopholes. And banks argued that it would hurt the economy. The FDIC’s vote now puts the rule out for public comment.
The Federal Reserve has also approved a draft of the proposal, called the Volcker Rule after former Fed Chairman Paul Volcker.
For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out. That’s what happened during the 2008 financial crisis.
A harder line with bankers might help President Barack Obama win over protesters on Wall Street. Many say Obama was too lenient on the banks because he continued the bailouts that began under President George W. Bush.
Congress and Obama had hoped the Volcker Rule would blunt such criticism. But they left most of the details for regulators to sort out. It’s unclear how strictly the ban will be enforced.
At least one of the protesters on Wall Street was willing to give the rule a chance. Robert Eatman, who was protesting in New York on Tuesday, called the rule a “decent effort.”
Eatman worked on Wall Street for 20 years as an office manager and in other positions at securities firms. He said that if financial rules for banks hadn’t been relaxed in the late 1990s, “the foundation for this reform would have been in place” already.
Under the draft rule, banks must hold investments for more than 60 days. Regulators determined that that was enough time to limit speculative trading.
The Securities and Exchange Commission must still vote on the rule, and then the public has until Jan. 13 to comment. The rule is expected to take effect by July after a final vote by all the regulators. Banks would have until July 2014 to comply.
Critics contend that the rule as written is too vague and its effect on risk-taking will be limited. Banks have a history of working around rules.
The rule was proposed by the Fed. Some critics argue the Fed often capitulates when bankers complain that regulations make it harder for them to do business.
The banking industry said Tuesday the rule is too complex to work and will put U.S. financial firms at a competitive disadvantage to those in other countries.
“How can banks comply with a rule that complicated, and how can regulators effectively administer it in a way that doesn’t make it harder for banks to serve their customers and further weaken the broader economy?” Frank Keating, head of the American Bankers Association, said in a statement.