That's Gonna Hurt: Bankers Brace for the Volcker Rule

With less than a week before regulators vote on the Volcker Rule, Wall Street firms are anxious that the regulation inspired by the financial crisis could wreck the profits they earn from trading. Bloomberg reported today that the Wall Street banks pull in $44 billion a year from making markets and quotes three senior U.S. bankers who are “wondering whether they’ll have to change practices or curtail business in some less-liquid markets.”

The rule proposed by former Federal Reserve Chairman Paul Volcker is supposed to prevent banks that take in federally insured deposits from engaging in risky trades that could result in losses for taxpayers. But as I wrote last month, banks are trying to carve out a broad exception for trades that can be considered risk-reducing hedges. A hedge, as the headline on the online article said, is “The Five-Letter Word No One Can Define.”

By some accounts, the Volcker Rule will be tougher than expected. In its report today, the Wall Street Journal said the rule tightly restricts what the banks can count as permissible hedging, saying that hedging activity should shrink or alleviate “one or more specific, identifiable risks,” such as market risk, currency or foreign-exchange risk, and interest-rate risk.

No one’s sure how much bank profits will be hurt because so much depends on how the rule is written. According to Bloomberg, Standard & Poor’s has estimated that the change could reduced the combined pretax profits of the eight largest U.S. banks by $2 billion to $10 billion a year.

As Bloomberg reports, regulators—including the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Commodity Futures Trading Commission—are scheduled to meet Dec. 10 on the rule’s final version. The Securities and Exchange Commission probably will act at about the same time.

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