This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Volcker Rule Could Trigger Big-Bank Breakup

Stocks in this article: BAC C JPM GS MS BK STT BLK

NEW YORK (TheStreet) -- It's almost time for the Volker Rule to be finalized, possibly forcing earth-shattering changes at the largest U.S. banks.

The Federal Reserve, along with the U.S. Treasury, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are expected to complete their rule changes next week to implement banning "proprietary trading," as required under the "Volcker Rule," which was named after former Federal Reserve chairman Paul Volcker and included in the Dodd-Frank banking reform legislation signed into law by President Obama in 2010.

The regulators rolled out their proposed rules to implement Volcker way back in October 2011. The rules aim to prohibit bank holding companies from engaging in most forms of proprietary trading while severely limiting their ability to invest in private equity funds and hedge funds. The rule includes "exemptions" to the short-term trading ban will be the scene of a major battle between the large banks, the regulators and members of Congress.

The Volcker Rule is meant to include "exemptions" from the ban on short-term proprietary trading, in order to allow banks to hold sufficient inventories of securities to fulfill their roles as market makers, however, a major problem with the proposed rules was the lack of a definition on what "short-term" actually means. Definitions of "hedging" and "market making" were also vague.

The Federal Reserve in April 2012 announced that banks would need to be in full compliance with the Volker Rule by July 2014. Even before that announcement, many of the largest banks, including JPMorgan Chase (JPM), Bank of America (BAC) and Morgan Stanley (MS) began to shut down their proprietary trading operations.

But the finalized Volcker Rule will still be very important to the big banks.

"A broad definition of prop trading (with narrow exemptions) that is aggressively enforced could be the worst outcome for the largest banks," according to KBW Washington analyst Brian Gardner.

In a note to clients on Wednesday, Gardner wrote that the finalized rules could "accelerate the dis-intermediation of the Global SIFIs, pushing business to PE firms such as BlackRock, the shadow banking systems and to smaller brokers such as Jeffries."

SIFI stands for Systemically Important Financial Institution. These are the banks that are subject to Volcker as well as the higher capital requirements under Basel III. In addition to the three banks mentioned above, U.S. SIFIs include Citigroup (C), Goldman Sachs (GS), Bank of New York Mellon (BK) and State Street (STT) of Boston. These banks have large prime brokerage operations and/or large asset management and custody operations.

KBW's analyst team believes a significant portions of SIFIs' business could be pushed to "PE firms such as BlackRock (BLK), the shadow banking systems and to smaller brokers such as Jeffries."

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs