Regulators adopt Volcker Rule to limit banks’ speculation

The nation’s top regulatory agencies adopted the final version of a rule aimed at preventing banks from taking risky bets that supporters argued could endanger the financial system.

The Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission voted Tuesday to approve the Volcker Rule, the centerpiece of the 2010 Dodd-Frank financial overhaul.

The U.S. Commodity Futures Trading Commission and the Office of the Comptroller of the Currency also approved the rule Tuesday, according to media reports.

The goal of the rule is to prevent the nation’s largest lending institutions from taking speculative bets with their own money and taxpayer-backed deposits.

“I strongly support the goal of the rule, which is to eliminate short-term financial speculation by institutions that enjoy the protection of the safety net” of deposit insurance and other federal banking programs, said Fed Vice Chair Janet Yellen, President Barack Obama’s nominee to be the central bank’s next chief.

The Fed board also voted unanimously to grant a one-year extension, until July 2015, for banks to fully comply with the new provisions.

Yellen and other Fed officials, including Chairman Ben Bernanke, said the revised rule struck the right balance in protecting taxpayers from excessive risk-taking by banks while allowing for liquidity in financial markets by allowing banks to continue hedging and engaging in market-making activities.

The Volcker Rule puts in place new requirements for complying with the tighter-than-expected regulations. Bank chief executives would be required to sign off on their firms’ compliance with the rule.

“In the past, a lack of robust record-keeping and reporting requirements made it difficult for regulators to examine large banking organizations and to effectively enforce regulations,” FDIC Chair Martin Gruenberg said in a statement.

Regulators sought 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 penalty.

Bart Chilton, an outspoken CFTC commissioner, said the final rule was sufficiently strong to win his support.

“We should never again be put in a circumstance where too-big-to-fail high rollers play games of chance with our nation,” Chilton said in a statement. “This rule takes a heavy velvet rope with brass ends across the doorway and closes the high roller’s room.”