Rep Bachus warns Geithner on "Volcker rule"

WASHINGTON (Reuters) - The Republican front-runner to head a key U.S. congressional bank oversight panel has urged regulators to consider whether a new rule limiting risky trading by U.S. banks may handicap them globally, according to a letter obtained by Reuters on Thursday.

In a sign of the policy position of the heir-apparent to the chair of the U.S. House of Representatives' Financial Services Committee, Representative 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 November 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.

The rule is named after its author, former Federal Reserve Chairman Paul Volcker, an outside economic adviser to President Barack Obama. Details of the complex rule are being fleshed out by regulators and implementation will take place over several years.

Separately on Thursday, the two main proponents of the Volcker rule in the Senate wrote regulators asking them to strictly enforce the rule 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.

This is the second letter the senators have sent regulators. Last week they penned a letter with 16 of their colleagues advocating a two-tiered regulatory approach whereby the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission would monitor the rule on a day-to-day basis while banking regulators performed deeper and longer reviews.

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.

In Tuesday's midterm U.S. elections, Republicans won a majority of the seats in the House, putting Bachus on track to take over the Financial Services Committee next year. It is currently chaired by Democrat Barney Frank.

"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.

Bachus urged fellow lawmakers during the debate over the "Volcker Rule" earlier this year to take into consideration its global impact if other nations failed to adopt similar limits.

He reiterated his concerns about regulatory arbitrage, global bank competition and profitability, shared by many in the banking industry, in his letter to Geithner.

Questioning the need for the rule and criticizing its costs, he wrote: "I strongly recommend that your study of the Volcker Rule take account of how trading activities fit into the core business plan of global banks, as well as the consequences for U.S. banks and the banks' clients of prohibiting those activities in the U.S. while they continue to be permitted everywhere else in the world."

Some of the giants of the U.S. banking industry -- including Goldman Sachs JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America -- are already making moves to comply with the rule.

Some are reducing proprietary trading operations, while others are moving out of hedge fund and private equity operations. "Shuttering these operations will cause these firms to be less profitable," Bachus wrote to Geithner and other members of the Financial Stability Oversight Council.

The council was set up under the Wall Street reform bill as a coordinating body for financial regulatory agencies.

(Editing by Richard Chang)