House Dems urge regulators to rethink Volcker Rule

By Peter Schroeder - 11/16/11 05:07 PM ET

House Democrats want regulators to go back to the drawing board on the Volcker Rule, arguing the current version is too complicated and filled with loopholes.

The group of lawmakers, led by Reps. Maurice Hinchey (N.Y.) and Peter Welch (Vt.), wrote to Federal Reserve Chairman Ben Bernanke, calling for a second effort on the cornerstone of the Dodd-Frank financial reform law.

"We believe the draft rule falls far short of the reform needed to protect our country from the kind of risk-filled financial activities that caused havoc on our economy," the 17 lawmakers wrote.

In October, the Fed and other financial regulators rolled out a proposed version of the Volcker Rule aimed at cracking down on propriety trading, which is when a bank trades for its own profit and not for its clients. The rule also intends to limit a bank's relationship with riskier hedge funds or private equity funds — an effort to prevent the problems that ran rampant in the highly interconnected financial system during the last crisis.

Regulators have their hands full putting that idea into practice: the proposed rule ran nearly 300 pages, while asking for public input on nearly 400 specific points the regulators are still mulling.

Banks and financial institutions are pressing regulators to keep the rule flexible, warning that a rigid rule could make it difficult for financial institutions to operate effectively and could hinder financial markets.

But advocates of major Wall Street reform, including the House Dems, want to see regulators craft a strong ban to prevent banks from making risky trades — they think regulators missed the mark in their first effort.

"Unfortunately, the Federal Reserve's draft Volcker Rule is unnecessarily complex and includes several large loopholes that undermine Congress's intent to protect banking deposits from risky trading activities," wrote the members. "For example, under the draft rule, commercial banks would be allowed to engage in market making and hedging activities that can provide easy cover for risky proprietary trading. The draft rule also relies too heavily on banks to self regulate and self report."

This post updated at 6:38 pm.