U.S. Regulators Prepare to Vote on Volcker Rule

U.S. federal regulators are poised to approve the Volcker rule later today, a measure designed to limit risky trading practices by banks in the aftermath of the 2008 financial crisis.

Named after former Federal Reserve Chairman Paul Volcker, who also served as an advisor to President Barack Obama, the rule will prohibit banks from engaging in proprietary trading — that is, trading for their own profit. Additionally, it will impose restrictions on banks’ investments in certain trading vehicles like private equity and hedge funds.

A vote by five federal agencies, including the Federal Reserve and the Securities and Exchange Commission, is anticipated to occur later today.

Should the rule receive approval, it will be integrated into the 2010 Dodd-Frank Wall Street Reform Act, which aims to eliminate the need for taxpayer-funded bailouts of large investment banks.

U.S. Treasury Secretary Jacob Lew expressed last week that the Volcker rule will enhance financial oversight under the Obama administration. “It prohibits risky proprietary trading while protecting essential economic activities like market-making,” Lew stated. He emphasized that regulators have worked diligently to strike a balance that safeguards the economy and taxpayers while allowing room for effective financial markets.

Proponents of the rule argue that it will mitigate risky trading behaviors by banks, which were responsible for the significant losses incurred by J.P. Morgan Chase during its London Whale derivatives trade last year.

Conversely, banks contend that the rule could diminish profits and complicate their ability to hedge against market risks. In anticipation of the ruling, many Wall Street banks, including Morgan Stanley, Goldman Sachs, and Citigroup, have already phased out their proprietary trading divisions.