FDIC backs ban on banks trading for own profit

The Federal Deposit Insurance Corp. backed the draft rule on a 3-to-0 vote. The ban on so-called proprietary trading was required under the financial overhaul law.

Critics dismissed the effort as weak and marred by loopholes, and banks argued that it would hurt the economy. The FDIC’s vote now puts the rule out for public comment.

The Federal Reserve has also approved a draft of the proposal, called the Volcker Rule after a former Fed chairman, Paul Volcker.

For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out, which is what happened during the 2008 financial crisis.

A ban on proprietary trading could help President Obama in next year’s election by showing he has pushed for tougher policies to curb risky trading on Wall Street.

A harder line with bankers might also help Obama win over protesters on Wall Street. Many say Obama was too lenient on the banks because he continued the bailouts that had begun under President George W. Bush.

Congress and Obama had hoped the Volcker Rule would blunt such criticism. But they left most of the details for regulators to sort out. It is unclear how strictly the ban will be enforced.

Under the draft rule, banks must hold investments for more than 60 days. Regulators determined that that was enough time to limit speculative trading.

Managers would be required to make sure bank employees comply with the restrictions. But the rule does not say what happens if they do not.

Traders should not be paid in a manner that encourages risk-taking, but the rule does not outline what that entails.

The Securities and Exchange Commission must still vote on the rule, and then the public has until Jan. 13 to comment. The rule is expected to take effect by July after a final vote by all the regulators. Banks would have until July 2014 to comply.

Critics contend that the rule as written is too vague and its effect on risk-taking will be limited. Banks have a history of exploiting loopholes, and in this case banks can make most trades simply by arguing that the trade offsets another risk that the bank bet on.

The draft rule “draws too few bright lines to make clear what banks can and cannot do,’’ said Bartlett Naylor, financial policy advocate at the liberal group Public Citizen. “The regulators are proposing that they will detect the difference between various trades by fishing through complex data provided by the banks after the fact. This is an invitation for evasion.’’

The rule was proposed by the Fed. Some critics argue the Fed often capitulates when bankers complain that regulations make it harder for them to do business.

Wall Street banks say the ban on proprietary trading could prevent them from buying and selling investments that their customers might want. And the banking industry said yesterday that the rule is too complex to work and will put US financial firms at a competitive disadvantage to those in other countries.