November 4, 2010 / 9:50 PM / 7 years ago

U.S. Rep Bachus warns Geithner on "Volcker rule"

* Bachus urges global outlook by regulators on rule

* Says big banks’ competitiveness, profits at risk

By Kevin Drawbaugh

WASHINGTON, Nov 4 (Reuters) - The Republican front-runner to head a key U.S. congressional bank oversight panel has urged regulators 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 Nov. 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.

Banking lobbyists are hoping to soften the impact of the 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 (GS.N) JPMorgan Chase (JPM.N), Morgan Stanley (MS.N), Citigroup (C.N) and Bank of America (BAC.N) -- 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.

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