No significant changes have been made to a provision in the financial regulatory bill that would require major banks to spin off their swap desks, according to a spokeswoman for the Senate Agriculture Committee.
She acknowledged that a two-page document from committee staff has been circulating on Capitol Hill. But “it’s a clarification document…it doesn’t weaken the provision” proposed by Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) in the reform legislation. The bill is being reconciled in House-Senate conference (see Daily GPI, May 25).
The document calls for major banks’ swap desks to be “separately capitalized,” and gives banks a two-year transition period to spin off their swap desks.
The controversial provision, which is opposed by Wall Street banks, has picked up some support from both the Federal Reserve Bank of Kansas City and Federal Reserve Bank of Dallas, House Agriculture Committee Chairman Collin Peterson (D-MN) and House Speaker Nancy Pelosi (D-CA), said House agriculture spokeswoman Courtney Rowe.
Lincoln’s “Section 716 [in the reform bill] appropriately allows banks to hedge their own portfolios with swaps or to offer them to customers in combination with traditional banking products. However, it prohibits them from being a swaps broker or dealer, or conducting proprietary trading in derivatives. The risks related to these latter activities are generally inconsistent with the funding subsidy afforded institutions backed by a public safety net. Such activities should be placed in a separate entity that does not have access to government backstops. These entities should be required to place their own funds at risk,” wrote Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, to Lincoln.
London’s Financial Times reported that Paul Volcker, the former Federal Reserve chairman, also is softening his opposition to Lincoln’s spin-off proposal.
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