FDIC Backs Ban On Some Risky Bank Trades

The Federal Deposit Insurance Corporation has approved the first draft of a rule aimed at stopping federally-insured banks from carrying out certain trades with their own money. The measure still has to be approved by other agencies including the Securities and Exchange Commission.

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RENEE MONTAGNE, HOST:

NPR's business news starts with a new rule for banks. For years banks have made huge risky bets with their own money. Now federal regulators have approved the first draft of a rule aimed at cracking down on these types of trades. The rule was first proposed by former Federal Reserve Chairman Paul Volcker, who said this high risk behavior threatened the stability of the financial system. NPR'S Jim Zarroli reports.

JIM ZARROLI, BYLINE: The so-called Volcker rule bars federally insured banks from certain types of trading carried out with their own money. They could no longer trade stocks, derivatives and corporate bonds, for instance. They also could no longer have financial relationships with hedge funds and private equity firms. These types of activities have been highly profitable for many banks. James Angel is an associate professor of finance at Georgetown University.

JAMES ANGEL: Regulators already have plenty of tools in their arsenal to clamp down on what they perceive to be unsafe or unsound banking activities. This just makes it explicit what Congress thinks those activities are.

ZARROLI: The rule was approved yesterday by the Federal Deposit Insurance Corporation. It still has to be approved by other federal agencies, including the Securities and Exchange Commission.

Bank industry officials said the rule would put U.S. banks at a competitive disadvantage against foreign rivals by sharply restricting the ways they can make a profit. But bank critics were also unhappy, saying the rule has been watered down. The rule allows banks to carry out certain kinds of hedging activities and also to trade in currencies and government bonds. And critics predict banks will come up with new ways to get around the new restrictions. Jim Zarroli, NPR News, New York.

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