Those requirements, amendments to the Bank Holding Company Act of 1956 and other prior legislation, are meant to address the systemic risk issues that arose during the 2008-09 financial crisis and would, in the FDIC’s words, prohibit banks from executing transactions or engaging in “any activity that would:
1) involve or result in a material conflict of interest;
2) result in a material exposure to high-risk assets or high-risk trading strategies;
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3) pose a threat to the safety and soundness of the banking entity; or
4) pose a threat to the financial stability of the United States.”
Specifically, the rules are meant to prohibit banks and their subsidiaries from engaging in short-term proprietary trading for the bank’s own account and bank ownership of hedge funds or private equities; most of the details of the proposed Volcker rule were leaked last week to the media. The FDIC said it would accept comments on its proposed rulemaking until Jan. 13, 2012; the final rules are scheduled to be implemented by July 2012.
The rule, named for former Federal Reserve Chairman Paul Volcker, who proposed the ban on proprietary trading, arguing that it encouraged banks to take excessive risks, provides exemptions to those prohibitions, and is being issued in concert with the Federal Reserve (which approved the proposed rulemaking on Tuesday morning), the Office of the Comptroller of the Currency (OCC), and the SEC (which is scheduled to vote on the proposal on Wednesday). The FDIC said in formulating the proposed rulemaking it had consulted with the staff of the Commodity Futures Trading Commission (CFTC).