The Republican front-runner to head a key U.S. congressional bank oversight panel has urged regulators to consider whether a new rule limiting hedge fund and buyout investing by U.S. banks may handicap them globally, according to a letter obtained by Reuters, publisher of Buyouts.
In a sign of the policy position of the heir-apparent to the chair of the U.S. House of Representatives’ Financial Services Committee, Rep. Spencer Bachus raised basic questions in the letter about the impact of the “Volcker Rule” enacted into law in July.
“If the Volcker Rule’s prohibitions are expansively interpreted and rigidly implemented against U.S. institutions while other nations refuse to adopt them, the damage to U.S. competitiveness and job creation could be substantial,” Bachus wrote in the Nov. 3 letter to Treasury Secretary Timothy Geithner and other top regulators.
The Volcker Rule is a provision of the landmark Wall Street reforms signed into law in July by President Barack Obama. The reforms won approval in Congress over the opposition of most Republicans, including Bachus of Alabama.
The three-part rule curbs proprietary trading by banks unrelated to customers’ needs; limits the involvement of banks in hedge funds and private equity; and imposes a new cap on the domestic expansion capacity of the largest U.S. banks.
Its author, former Federal Reserve Chairman Paul Volcker, an outside economic adviser to President Obama, urged U.S. regulators to spell out clear guidelines for the implementation of the rule.
Volcker warned that bankers and financial services lobbyists will work hard to find loopholes and that regulators must clear up any potential ambiguities.
In a letter to the Financial Stability Oversight Council—a U.S. regulator in charge of monitoring risks in markets—Volcker also emphasized that implementation of the curbs on proprietary trading needs to start at the top.
“In consulting informally with senior bank officials, my sense that both ‘the tone at the top’ and effective procedures for control will be necessary for effective implementation,” he said.
The two main proponents of the Volcker Rule in the Senate also wrote regulators asking them to enforce the rule strictly and be vigilant about attempts to get around enforcement.
Democratic Senators Carl Levin and Jeff Merkley wrote that, in particular, the rule should seek to stop banks from conducting proprietary trading under the guise of “market making.”
To police against this activity the senators said the rule should contain a time element, arguing the longer a position stays on a bank’s books the more likely it will be viewed as a proprietary trade.
They also argued that the rule should give regulators the authority to examine all trading accounts; otherwise, proprietary trades could take place in a type of account that is exempted from the rule.
In a nod to the concerns raised by Bachus and others, Levin and Merkley urged regulators to press other countries to adopt policies similar to the Volcker Rule.
Banking lobbyists are hoping to soften the impact of the Volcker Rule by influencing the implementation process, which Republicans also will seek to accomplish through congressional committee oversight, according to policy analysts.
“It is truly astounding that less than a day after winning control of the people’s House of Representatives, Republican leaders are already hard at work doing the business of big Wall Street banks,” said Tom McMahon, executive director of Americans United for Change, a progressive lobbying group.
Some of the giants of the U.S. banking industry—including Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America—already are making moves to comply with the rule.
Kevin Drawbaugh is a Reuters correspondent in Washington, D.C. Kristina Cooke and Caren Bohan also contributed to this article.