Paul Volker Rule Changes

Obama stunned financial markets in January with the proposal to restrict proprietary trading by banks, get them out of the hedge fund business, and limit their future growth. Now some analysts are saying that the Volcker rule could be watered down and included in a final legislative package expected to emerge from the banking committee as early as mid-February.

Richard Bove, a banking analyst at Rochdale Securities, said in a research report that the Volcker rule was “poorly thought out” and it “looks to be doomed.”

Treasury Secretary Timothy Geithner said on Tuesday at a separate hearing that the rule aims “to make sure we have clear constraints on risk-taking by these large institutions so they don’t bring us to the edge of collapse again.”

The Senate’s consideration of the proposals comes days ahead of a meeting in Canada on Friday and Saturday of finance ministers of the Group of Seven rich nations, where financial regulation reform is expected to be a hot topic.

More than a year since the 2008 financial crisis that rocked economies worldwide, the U.S. and EU governments are working on reforms to banking and market regulation that are expected to be the most sweeping since the 1930s.
And now the Obama administration is backing off its proposed “Volcker rule”. It is being suggested that a watered-down version be implemented rather than issuing an outright ban on proprietary trading. The White House wants to give regulators some discretion to define proprietary trading and federally insured banks that want to run prop trading desks can do so if they keep higher cash reserves. Officials say they need flexibility to avoid disrupting the $7.2T Treasurys market, but the White House may just be trying to save face in light of strong congressional opposition to the original proposal.