The Administration has sent Congress statutory text of reforms initially supported by former FRB Chairman Volcker and thus often called the “Volcker Rule.” The language would implement a ban on proprietary trading in any insured depository or related parent company, as well as a prohibition on investment in all, or relationships with, affiliated hedge and/or private-equity funds. The measure would also implement a separate Administration proposal, which would cap the share of adjusted liabilities any firm could control in the U.S. going forward to no more than ten percent. However, existing positions larger than that limit would be grandfathered and bigger positions could be held if these resulted from emergency acquisitions. All of this language is intended to strike at what some see as the cause of recent systemic-risk incidents – very large institutions that take risk backed by explicit FDIC or implicit too-big-to-fail federal protection. The proposal would strike at the heart of diversified financial-services firms, as well as undo a major source of profitability for many of them. However, hedge funds and private-equity firms might find it possible to recoup some competitive ground lost in recent years to financial institutions.


 The full text of this report is available to subscription clients.