24 June 2010

Volcker rule under attack in US financial reform negotiations

Senate negotiators are expected to offer changes to the financial bill that would soften the Volcker rule. There is widespread speculation that the Senate negotiators will propose language that would allow banks to invest a small ammount of their capital in internal hedge funds.

Senate negotiators are expected to offer changes today to the financial reform bill that would soften the Volcker rule. There is widespread speculation that the Senate negotiators will propose language that would allow banks to invest a small amount of their capital in their internal hedge funds or proprietary trading desks.

 

The compromise, designed to win the support of at least three Republican senators, comes as lawmakers struggle to reach agreement on financial reform this week. To appease Democrats in favour of stronger regulation, negotiators also plan to make it harder for regulators to undermine the rule, according to lobbyists and Congressional aides involved in the discussions.

 

In a potential victory for bank lobbyists, banks would be allowed to invest up to 2 percent of total Tier 1 capital in hedge funds and private equity funds, under a version of the Volcker rule outlined in a document obtained by Reuters.

The document proposes a more specific 3-percent Tier 1 capital cap on bank interests in hedge fund "seed capital," and a cap on banks' stakes in private equity funds that could not exceed 5 percent of a funds' total capital.

 

The Volcker rule would ban banks from trading with their own capital or sponsoring hedge funds. The Senate approved the rule last month. It was not included in the version of the bill passed by the House late last year.

 

Ironically, it is now the Senate negotiators who are trying to water-down the provision by providing for this exemption, while House members yesterday proposed keeping the original Senate version.