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A Volcker reprieve for banks?

By Claes Bell ·
Wednesday, March 28, 2012
Posted: 5 pm ET

Looks like U.S. banks could get a few more months to play the markets with their own money.

With the July 21 deadline for implementing the Volcker rule getting closer and it looking increasingly likely the final rule won't be ready on time, a bipartisan group of lawmakers has introduced legislation to push that deadline back. From Steven Sloan and Phil Mattingly at Bloomberg News:

Six senators introduced legislation yesterday that would postpone implementation of the so-called Volcker rule from the July 21 deadline set by the Dodd-Frank Act and align it with regulators' completion of detailed rules for the trading ban. Meanwhile, Representative Barney Frank, the Massachusetts Democrat who co-authored the law that requires regulators to impose the ban, released a statement urging banking agencies to complete a simplified version by Sept. 3.

If you're just tuning in to the issue, the Volcker's main purpose is to prevent banks from investing their own money in the markets, a practice called proprietary trading. While profits from those investments often make banks a lot of money, the lawmakers who crafted the Dodd-Frank financial reform law decided that the backing of U.S. taxpayers through the FDIC and other channels could lead banks to again make the kind of risky investments that got them in trouble during the housing bust.

Keeping banks from making risky investments sounds great in theory, but putting it into practice has been a devilishly complex task for regulators, who've run up against two big problems:

  • Banks temporarily buy and sell securities to help match buyers and sellers in the open market, a practice called market making. If banks can't do that anymore, it may make the markets less efficient and raise the cost to invest in many types of securities for companies and individual investors alike.
  • The line between trading on behalf of clients and trading on the bank's own behalf can be blurry at times, making writing specific rules to classify which is which difficult. The resulting complexity could make compliance difficult and expensive.

As a result, regulators at the Fed have gotten plenty of flack from the banking industry, consumer advocates and other groups in the form of a barrage of comment letters in February.

While the Senate bill won't solve either of those issues directly, it will give the Federal Reserve a little breathing room to finish tweaking the law. That might come in handy, seeing as how Ben Bernanke himself said in February that the Fed wasn't likely to get it done on time.

What do you think? Is keeping banks secure and preventing future bailouts worth boosting the cost to invest and other potential negatives of Volcker?

Follow me on Twitter: @ClaesBell

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