Overhaul Debate Centers On Bank Risk-Taking As the battle over financial industry rules nears its final phase, lawmakers will be focusing on how much risk banks should be allowed to take. The measure is heading to a House-Senate conference, where banks are trying to kill a rule that would prohibit them from trading for their own profit.
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Overhaul Debate Centers On Bank Risk-Taking

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Overhaul Debate Centers On Bank Risk-Taking

Overhaul Debate Centers On Bank Risk-Taking

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The Financial Regulation bill now before Congress could rebuild some of the walls between banks and the rest of the financial world. The idea would be to limit the risk your bank can take. The bank can do whatever you want with your money, but the bank would be limited in the kinds of investments it can try on its own. That proposal is one of the final issues unresolved as the bill nears completion. Here's NPR's John Ydstie.

JOHN YDSTIE: After the Senate passed its version of the financial overhaul bill two weeks ago, some analysts suggested that consumer forces had prevailed, despite the hundreds of millions of dollars the banking industry spent trying to influence the outcome.

But the battle isn't over yet. It will continue during the next few weeks when a handful of lawmakers on the House-Senate conference committee make final decisions on the bill.

Heather McGhee, of the consumer advocacy group Demos, says the next few weeks will be key.

Ms. HEATHER MCGHEE (Director, Demos): There's a very narrow window of time. There's a very small group of members to influence, and it is sort of the Super Bowl of lobbying right now on the Hill.

YDSTIE: Scott Talbott of The Financial Services Roundtable, declined to discuss any details of the industry lobbying effort. He says his group actually supports most of the overhaul legislation. It only has problems with about 20 percent of what's in the House and Senate bills, he says.

Mr. SCOTT TALBOTT (Senior Vice President for government affairs, The Financial Services Roundtable): About half of the 20 percent is still on the table for discussion and, depending on which way the conferees go, could move the needle one way or the other.

YDSTIE: One provision the big banks hope to defeat in conference committee, is something called the Volcker rule, named after the former Federal Reserve chairman and current White House adviser, Paul Volcker. It would ban banks from Main Street to Wall Street, from what's called proprietary trading.

They'd be able to trade in financial markets on behalf of their customers, but not for their own profit. They'd also be barred from owning equity funds or hedge funds. Scott Talbott says the Volcker rule is counterproductive.

Mr. TALBOTT: Proprietary trading as well as investments in hedge funds and equity funds are a solid asset-management technique, and when done properly help the bank manage its own risk, as well as the risk for its clients.

YDSTIE: The banks are arguing, to House and Senate conferees, that proprietary trading shouldn't be banned. Instead, banks should be required to hold more capital bigger cushions against losses for more risky investments.

Mr. SIMON JOHNSON (Former chief economist at the International Monetary Fund): This is the devil-in-the-details stage, and it turns out the devil works for the lobbyists.

YDSTIE: Simon Johnson, a former chief economist at the IMF says that there's still plenty of time to influence the bill.

Mr. JOHNSON: This is where, you know, if you're on the inside and you know the tactical details and you can sway key voices at key moments, you can really gut a large part of what still remains on the meaningful side of this legislation.

YDSTIE: Johnson is the author of "13 Bankers." The book is highly critical of the risky behavior of the biggest banks that fueled the financial crisis. He supports curbing their risky behavior with measures like the Volcker rule. But, he points out, that Congress has left it to regulators to craft the details over the next two years. He says that means the Volcker rule will be gutted.

Mr. JOHNSON: When you want to kill something, the best way to kill it is not actually to have a big, all-out fight and vote it down on the Senate floor. The best thing is to send it off somewhere for study with very vague terms of reference, and you can be sure that by the time it comes back it will have taken on board a lot more of the banks' preferences.

YDSTIE: Economist Robert Litan, a vice president at the Kauffman Foundation, acknowledges bank lobbyists can have a big effect during the rule-making process.

Mr. ROBERT LITAN (Economist; vice president for research and policy, Ewing Marion Kauffman Foundation): When you get into talking about the nitty-gritty details or the fine language of bills, this is where lobbyists earn their money.

YDSTIE: But Litan doesn't blame the banks for trying to defeat the Volcker rule. He says banks are inherently risk-taking institutions. Every loan they make is a risk, for instance.

Mr. LITAN: I think the idea that we can significantly constrain their risk by enacting some version of the Volcker rule is close to fantasy.

YDSTIE: Litan says over the next two years, as regulators work out the details of the Volcker rule, the current anti-bank anger will probably subside. He says that will allow more rationality and less emotion to be applied to the issue.

John Ydstie, NPR News, Washington.

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