WASHINGTON (AP) — Banks would be barred from trading for their own profit instead of their clients under a rule federal regulators proposed Tuesday.
The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote. The ban on so-called proprietary trading was required under the financial overhaul law.
Critics on the left dismissed the effort as weak and marred by loopholes. And banks argued that it would hurt the economy. The FDIC’s vote now puts the rule out for public comment.
The Federal Reserve has also approved a draft of the proposal, called the Volcker Rule after former Fed Chairman Paul Volcker.
For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out. That’s what happened during the 2008 financial crisis.
A ban on proprietary trading could help President Barack Obama in next year’s election by showing he has pushed for tougher policies to curb risky trading on Wall Street.
A harder line with bankers might also help Obama win over protesters on Wall Street. Many say Obama was too lenient on the banks because he continued the bailouts that had begun under President George W. Bush.
Congress and Obama had hoped the Volcker Rule would blunt such criticism. But they left most of the details for regulators to sort out. It’s unclear how strictly the ban will be enforced.
At least one of the protesters on Wall Street was willing to give the rule a chance. Robert Eatman, who was protesting in New York on Tuesday, called the rule a “decent effort.”
Eatman worked on Wall Street for 20 years as an office manager and in other positions at securities firms. He said that if financial rules for banks hadn’t been relaxed in the late 1990s, “the foundation for this reform would have been in place” already.
Under the draft rule, banks must hold investments for more than 60 days. Regulators determined that that was enough time to limit speculative trading.
Senior and mid-level managers would be required to make sure bank employees comply with the restrictions. But the rule doesn’t say what happens if they don’t.
Traders should not be paid in a manner that encourages risk-taking, but the rule doesn’t outline what that entails.