Fed pledges to give banks clarity on Volcker rule

Thu Mar 22, 2012 2:47pm EDT
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By Sarah N. Lynch

WASHINGTON (Reuters) - A Federal Reserve official on Thursday downplayed the impact of regulators potentially missing a July deadline to finalize the Volcker rule's ban on proprietary trading, and said authorities will step in to provide clear guidance if needed in an effort to soothe any fears in the financial industry.

"There is obviously a real possibility that we don't meet the July 21st date," Fed Governor Daniel Tarullo told a Senate Banking Committee hearing.

"If we are not going to, I think it is incumbent on all the regulators to provide some guidance for firms to let them know exactly what the expectations will be and not let this hang out there as an unknown, and I think we should be able to do that if needed," he said.

Banks have raised concerns that if a final rule is not ready by July 21, when the trading restrictions take effect under law, there could be disruptions in markets because of a lack of clarity on how to comply with the new crackdown.

The proprietary trading ban is known as the Volcker rule, after former Federal Reserve chairman Paul Volcker who championed the crackdown. It was included in the 2010 Dodd-Frank financial oversight law.

The Volcker rule bans banks from trading with their own funds and greatly limits their ability to invest in hedge and private equity funds.

The idea is to limit excessive risk-taking by banks that enjoy government backstops such as deposit insurance and access to Fed loans.

The Volcker rule could significantly bite into the profit potential of Wall Street firms including Goldman Sachs Group Inc and Morgan Stanley.   Continued...