* Senators unveil tougher trading ban, with exceptions
* Geithner, lawmakers huddle on derivatives provision
* Democrats aim for final bill by Thursday night
(New throughout with trading ban proposal)
By Kevin Drawbaugh and Andy Sullivan
WASHINGTON, June 24 Banks would face tougher
curbs on trading but would be able to hold limited hedge fund
positions under a proposal unveiled by Senate Democrats as they
closed in on a final overhaul of U.S. financial regulations.
The proposal, known as the "Volcker rule," balances
Democrats' desire to crack down on Wall Street with their need
to retain the votes of moderates from both parties to pass the
most sweeping overhaul of the Wall Street rulebook since the
"We think this proposal addresses the underlying concern of
putting depository funds at risk," said Democrat Christopher
Dodd, the top Senate negotiator. "It puts a stop to proprietary
trading but also recognizes that there are legitimate hedging
activities that banks need to engage in."
Lawmakers from the House of Representatives on a panel
tasked with hammering out a final bill had yet to weigh in on
But they face enormous pressure to resolve the issue in the
coming hours, before President Barack Obama discusses recovery
and reform with the leaders of other economic powers at the
Group of 20 meeting in Canada. [ID:nN24260273]
Passage would also give Democrats an important legislative
victory, alongside healthcare reform, ahead of congressional
elections in November.
As the global economy emerges from the financial crisis of
2007-2009, Europe's efforts to present a united front on
regulation hit a roadblock on Thursday when lawmakers and
diplomats failed to agree on new hedge fund rules.
DUEL OVER DERIVATIVES
In Washington, lawmakers on the Senate-House panel had yet
to address the contentious issue of derivatives regulation.
Dozens of House Democrats want to strip out a provision
that would require banks to spin off their derivatives-trading
operation but that measure's sponsor, Democratic Senator
Blanche Lincoln, was holding firm.
Treasury Secretary Timothy Geithner worked with lawmakers
to work through the standoff.
On Wall Street, the prospect of tough new rules sent U.S.
bank stocks lower, helping to pull down the overall market. The
KBW banks index .BKX closed down 2.2 percent.
The rewrite of the regulations -- nearly 2,000 pages in all
-- aims to avoid a repeat of the crisis that plunged the global
economy into a deep recession and led to taxpayer bailouts of
troubled banks. It would saddle the industry with tougher
oversight and could cut revenues by billions of dollars.
The House-Senate panel agreed to tighten bank capital rules
to help them ride out future crises. [ID:nN24138650]
Banks would have five years to meet the rules, which force
them to exclude some riskier securities from core capital.
Banks with less than $15 billion in assets would be exempt.
Some $118 billion in bank assets would not count toward the
new capital requirements, according to credit ratings agency
Moody's Investors Service.
That could further worsen a credit crunch that is hampering
economic recovery, said Jeff Davis, bank analyst at Guggenheim
Partners, because banks may shrink their asset base to raise
their capital levels.
"Raising capital requirements right now is not helping the
lending environment," Davis said.
LAW BY EARLY JULY?
Lawmakers resolved some of their sticking points on
Thursday, agreeing to let regulators set higher standards of
duty for broker-dealers who give financial advice.
They also watered down a provision to give shareholders a
nonbinding vote on executive pay. That vote would take place
once every two or three years, not annually. [ID:nN24135850]
Democrats hope Obama can sign the reforms into law by July
4 but the final package must first win approval in both
chambers of Congress, where the votes of both liberal House
Democrats and moderate Senate Republicans will be needed.
"There are two very strong criticisms of this bill: one
that it is too big and the other that it is too little," said
Democratic Representative Barney Frank, the panel's chairman,
who looked as rumpled as the staffers who had worked through
Wall Street lobbyists have been unable to kill the overhaul
as Democrats ride a wave of public disgust at bank bailouts and
bonuses. Some 73 percent of Americans support strong financial
reforms, according to a Lake Research Partners poll touted by
Democrats on Thursday.
Still, members of the committee are likely to soften their
Dodd's proposal would toughen the trading ban on banks
first suggested by White House economic adviser Paul Volcker by
giving regulators less discretion to waive it.
But banks would be able to invest up to 3 percent of their
tangible common equity in hedge funds and private equity funds,
and bank investment in any single fund could not exceed 3
percent of the fund's capital. [ID:nN24195416]
The crackdown would force much trading activity onto
exchanges and clearinghouses in a bid to tame a $615 trillion
market that exacerbated the financial crisis and led to a $182
billion taxpayer bailout of insurance giant AIG (AIG.N).
Lincoln's provision would force banks to spin off
swaps-dealing operations into separately capitalized units.
At least 81 House Democrats have objected to that measure
and could vote against the final bill if the plan is included.
One plan being circulated in the afternoon would require banks
to spin off only their dealing in highly structured swaps but
it was unclear whether it had any traction.
One Senate centrist, Republican Scott Brown, was at the
center of efforts to weaken the "Volcker rule," according to
aides. Brown was poised to win exemptions sought by mutual
funds, insurers and banks in his home state of Massachusetts.
(Additional reporting by Kim Dixon, Roberta Rampton, Rachelle
Younglai, David Lawder and Charles Abbott in Washington and
Leah Schnurr and Elinor Comlay in New York; writing by Andy
Sullivan; Editing by Alistair Bell and John O'Callaghan)