The FDIC and FRB today issued the long-awaited, lengthy and very controversial proposal to implement provisions in the Dodd-Frank Act that ban most proprietary trading and hedge/private-equity fund holdings (see FSM Report PROPTRADE6).  Often called the Volcker Rule, this part of the law was among the most controversial and costly sections for the largest U.S. banking organizations, including foreign firms doing business here.  The final proposal includes over 350 questions, but also toughens up many provisions the industry initially hoped might be a more gentle approach to the Volcker Rule.  For example, the NPR includes a tough definition of “trading account” likely to curtail market-making activity in all but a few exempted classes and the definition of covered banking organization is broadly drawn to reach an array of offshore activities.  The fund restrictions are also stringent, with the NPR not only banning holdings conventionally considered in these categories, but also many securitization positions. Finally, the NPR includes new compensation restrictions and very stringent internal-control and corporate-governance requirements for banks with assets over $1 billion.  The only comfort bankers received is that the NPR will be out for a ninety-day comment period, with Acting FDIC Chairman Gruenberg indicating that the agencies will then proceed cautiously.   This is likely to postpone actual Volcker Rule implementation well past the initial July, 2012 deadline, but exacerbate change during the two-year transition period provided in the law.  This report analyzes the FDIC meeting adopting the NPR, which also included a staff presentation on the condition of the DIF.  Here, the FDIC is positive with regard to DIF recovery, although the agency for the first time indicated that it could need to alter its views if ongoing market turmoil increases the number and size of failed banks.

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