Financial council to start the clock on the implementation of the ‘Volcker Rule’

The Financial Stability Oversight Council (FSOC) is expected to start the clock soon on the implementation of the controversial “Volcker Rule” that aims to curb risky trading by the nation’s largest banks.

The council, established as part of the Wall Street reform law, has been meeting in recent months to tackle organizational issues. Now that those preliminary sessions are finished, the council will meet Tuesday to make its first foray into the debate over new financial regulations.

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According to a Jan. 14 Treasury Department announcement, the top agenda item for the council on Tuesday will be its study on the Volcker Rule.

The study, which is due by Jan. 21, is intended to provide a roadmap for regulators trying to implement the new regulations. The release of the study also starts the clock on implementation, as regulations for the rule will be due nine months after it is released.

The rule, named after former Federal Reserve Chairman and outgoing White House adviser Paul Volcker, is intended to prevent banks from engaging in “proprietary trading,” where a bank invests its funds without input from customers. 

The rule also prevents banks from having certain types of relationships with hedge funds or private equity funds. The goal of the provision is to prevent major banks from risking their capital on risky trades.

The rule has the backing of consumers groups but has drawn the ire of banks and some Republicans.

Like several other provisions in the Dodd-Frank reform bill, many of the details of implementation for the Volcker Rule were left up to regulators.

The shift in responsibility has set off a flurry of lobbying activity on the regulatory side, as interested parties all try to steer the rulemaking in a certain direction —including the top Republican on the House committee overseeing the financial reform effort.

Rep. Spencer Bachus (R-Ala.) warned the FSOC in a November letter that the rule will undermine American financial companies. Serving then as ranking member of the House Financial Services Committee, Bachus said the rule could “spark a mass exodus” from domestic banks to foreign ones, according to a copy of the letter obtained by The Hill.

Financial institutions abroad are not limited by the rule, and foreign leaders have shown little interest in following America’s lead, Bachus said.

Bachus, who now chairs the Financial Services Committee, has promised to re-examine Dodd-Frank, and could hold hearings examining the Volcker Rule.

Much of the debate over the FSOC study and recommendations depends on exactly how broadly the group recommends implementing the provision. Advocates have been pushing for explicit, specific language on what is permitted, while industry groups have called for broader definitions.

The FSOC, helmed by Treasury Secretary Timothy Geithner, includes Federal Reserve Chairman Ben Bernanke and the top regulators monitoring financial markets, including the heads of the Federal Deposit Insurance Corporation and Securities and Exchange Commission.

Its mission is to provide comprehensive monitoring of the nation’s financial system in an effort to prevent the factors that led to the financial crisis of 2008.