WASHINGTON (Reuters) - The Volcker rule's restrictions on proprietary trading and hedge fund investments could put U.S. banks at a competitive disadvantage to their foreign counterparts, a top U.S. banking regulator will tell lawmakers in testimony on Wednesday.
Acting Comptroller of the Currency John Walsh noted that other countries have not adopted restrictions similar to those of the Volcker rule, and foreign banks without certain U.S. operations will likely not fall under the reform.
"Accordingly, U.S. banks competing with these foreign banks will operate at a competitive disadvantage," Walsh plans to say in testimony before a House Financial Services panel.
Walsh's comments could give momentum to the financial industry's complaints that the Volcker rule, as proposed by regulators in October, is complex and could wreak havoc on markets and the economy if implemented in a haphazard way.
U.S. regulators at the OCC, Federal Deposit Insurance Corp, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission have been struggling to craft a clear proposal, as required by the 2010 Dodd-Frank law.
In December they extended the comment period on the proposal until February.
The Volcker rule would curb banks' trading with their own funds and would limit their investments in hedge funds -- restrictions that would reduce their profitability. However, proponents say it would also reduce risk to larger financial markets.
As laid out in Dodd-Frank, the Volcker rule prohibitions will start going into effect in July.
The main regulators involved in the Volcker rule are slated to appear before the committee on Wednesday to update lawmakers on their progress and discuss the proposal's impact on the marketplace.
While Walsh will warn that the rule could competitively harm U.S. banks, foreign entities have issued their own warnings to U.S. regulators.
In December, the Bank of Japan sent a letter to U.S. financial authorities warning that Japanese banks would need to reduce their U.S. operations because of the Volcker rule's scope.
Also in December, Canadian regulators also complained that the Volcker rule could hurt Canadian banks' ability to manage risk.
Supporters of the Volcker rule have argued the reform is needed to prevent banks that enjoy federal backstops, such as deposit insurance, from taking risks with their own capital that could put taxpayers on the hook for losses.
Another major concern likely to come up at Wednesday's hearing involves questions surrounding just how much money the Volcker rule will cost for banks to implement.
In addition to being forced to wind down investments in hedge funds and scale back trading, banks under the plan would also be forced to develop compliance programs.
House Republicans in particular have been critical of regulators for failing to conduct adequate cost-benefit analyses of Dodd-Frank rules, saying they fear burdensome regulation will only harm businesses in this economic climate.
In testimony, Walsh said the compliance and recordkeeping costs for banks regulated by the OCC are not expected to exceed $100 million in one year.
SEC Chairman Mary Schapiro also plans to say that the Volcker plan "would not appear to have a significant impact on small entities." Nevertheless, she will tell lawmakers that regulators are interested in much more feedback from the industry on how much the rule will affect banks' bottom lines.
"Covered banking entities are in the best position to provided estimated dollar costs for implementation and ongoing maintenance of the proposed compliance program," she said.
Reporting By Sarah N. Lynch and Dave Clarke; Editing by Steve Orlofsky