Top U.S. regulators are set to weigh new rules next week that would limit speculative trading by banks and subject other financial institutions to heightened oversight.
The Financial Stability Oversight Council, established by the Dodd-Frank financial regulation bill and led by the Treasury, is expected to review studies on the so-called Volcker rule and designation of nonbank financial firms at its meeting on Tuesday.
While only an interim step, the studies would offer the clearest insight yet on how federal authorities plan to implement sweeping new regulations.
"The studies are going to lay the groundwork for the proposed rules," said Scott Talbot, senior vice president of government affairs at the Financial Services Roundtable, an industry group representing financial-service companies.
They will also indicate how closely the regulators are listening to concerns voiced by the financial industry in hundreds of comments and scores of meetings meant to give banks, life insurers, hedge funds, asset managers and others a say in the final outcome. While consumer advocates hope the government takes a tough line, business groups want some indication that their concerns are being taken into account.
"I think when the studies are released we're going to really see how well the process is working or whether it's not working," said Tom Quaadman, the U.S. Chamber of Commerce's executive director for financial reporting policy.
The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, is designed to discourage banks from engaging in risky trades with their own money. This rule will force banks to scale back proprietary-trading desks and curtail relationships with hedge funds and private-equity funds.
The Wall Street overhaul law also requires heightened oversight of financial companies that are so large, complex or interconnected that their failure could destabilize the financial system.
Any bank holding company with more than $50 billion in assets is automatically classified as "systemically significant." Federal regulators also must decide which nonbanks deserve the designation.
Companies already are reacting to the new rules. Many are urging regulators to proceed with caution, lest they undermine the competitiveness of U.S. firms, while others are restructuring.
Morgan Stanley has reached an agreement with proprietary-trading chief Peter Muller that will allow his team of traders to form a new firm at the end of 2012, The Wall Street Journal reported earlier this week. And Goldman Sachs Group Inc. recently wound down one of its proprietary equities-trading desks. Under the Volcker rule, Morgan Stanley and other large U.S. banks have to shed their proprietary-trading units.
The Financial Stability Oversight Council was created to identify threats and respond to emerging risks in the U.S. financial system. The studies, officially due by Jan. 21, reflect the complexity and the difficulty of writing regulations that will affect a broad swath of the financial industry.
Treasury Secretary Timothy Geithner is council chairman. Other agencies include the Federal Reserve, Commodity Futures Trading Commission, Federal Deposit Insurance Corp. and the Securities and Exchange Commission.