Banks are likely to lose a key lobbying battle in the US over whether they will be forced to spin off their lucrative swaps desks, according to people familiar with financial reform negotiations in Congress.
Defeat, which would be a further blow to Wall Street, has been made more likely by Paul Volcker, the influential former Federal Reserve chairman, softening his opposition to the provision.
Blanche Lincoln, the Senate agriculture chairman, is the lead proponent of the plan, which would force banks to create a separately capitalized subsidiary to house the derivatives dealing operations – a significant source of profits for big banks, such as JPMorgan Chase .
The expensive restructuring could drive activity out of the largest Wall Street banks and into more lightly regulated rivals and overseas competitors, according to the Federal Reserve and Federal Deposit Insurance Corporation, which oppose the plan.
Mr Volcker – who has become a talisman of the financial reform effort ever since the “Volcker Rule” to force banks to end proprietary trading was embraced by Barack Obama, US president, in January – previously opposed the Lincoln provision.
Although he declined to say whether he now supported it, Mr Volcker told the Financial Times that his earlier criticism was based on the belief that a stricter spin-off was in the works and it was now a “relevant question” whether damage would be done if swaps desks could be kept within a bank holding company.
“I tend to think of the bank holding company as the relevant organization,” he said.
Mr Volcker added that it would be a mistake to ban banks from using swaps to hedge risk or from facilitating a customer who wants to hedge risk. “There was confusion about that – that’s the kind of thing I certainly would not do,” he said.
There remains disagreement over whether the legislation as currently drafted would prevent a newly capitalized swaps desk from selling a swap to a customer or from using them for its own hedging purposes. Ms Lincoln says it does not; many lawyers say it does.
Negotiations over the text, which is due to go to the White House to be signed into law by the end of next week, are focused on ensuring that those activities are preserved rather than removing the rule entirely, according to people familiar with the talks. However, that does not satisfy the industry or its regulators.
Some senators want to modify the Volcker Rule, which also prevents banks from owning or sponsoring hedge funds in the name of risk reduction, to allow banks to “organize” a hedge fund and make an investment in a small amount of capital alongside a customer. But Mr Volcker thought that would be the thin end of the wedge, adding “from my point of view, I’d like it pure”.
Mr Volcker, 82, has told members of Congress that he is canceling his normal salmon fishing trip to be on hand to provide advice.
“Normally I go to Canada – where the banking system is all healthy and straightforward,” he said.