WASHINGTON — Bankers have all but given up on defeating one of the most contentious provisions in the financial regulation bill — one that would effectively bar federally insured banks from trading for their own accounts — and are now focusing on battles like heading off a prohibition on derivatives trading.
As House and Senate negotiators head into a final push to send the legislation to President Obama, they have largely agreed to stricter limits on so-called proprietary trading than those envisioned in the versions passed by either chamber.
That outcome would be a victory for the White House and for the provision’s most dogged advocate, Paul A. Volcker, the former Federal Reserve chairman.
But with the so-called Volcker Rule now likely to become law after appearing to be dead at earlier points in the legislative process, banks are battling hard to fend off further restrictions on their activities.
Much of the action centers on a provision sponsored by Senator Blanche Lincoln, Democrat of Arkansas, to effectively bar banks from trading derivatives, the complex instruments that have been implicated in the financial system chaos that followed the near collapse of the mortgage market in 2008.
On Monday, Mrs. Lincoln offered to ease some of the toughest elements of her provision, but not enough to assuage Wall Street’s concerns.
Under her latest proposal, banks would have two years to spin off their derivatives arms. A bank holding company could still maintain a derivatives operation — but as a separate affiliate with its own capital, not as part of a commercial bank. In addition, companies that are not major dealers in derivatives would be exempted from her ban.
Even so, the six largest Wall Street banks, which dominate the derivatives trading business, quickly indicated that they would lobby fiercely to defeat the entire provision.
The House-Senate conference committee is to take up a variety of other issues on Tuesday, including the regulation of credit rating agencies, and in coming weeks it will address other flash points with the banks, like limits on credit card fees.
But the likelihood that the legislation will include a relatively tough version of the Volcker Rule on proprietary trading shows how the climate has grown more difficult over the last few months for Wall Street, banks and their lobbyists.
Representative Barney Frank of Massachusetts, the chairman of the House Financial Services Committee and a leader of the conference process, said last week that House and Senate negotiators had reached “conceptual agreement” on a proposal by Senators Jeff Merkley of Oregon and Carl Levin of Michigan, both Democrats, to expressly forbid banks from trading for their own accounts or from investing in hedge funds or private equity funds.
The House bill, approved in December before Mr. Obama endorsed the ban on proprietary trading, gives the Federal Reserve the right, but not the obligation, to prohibit proprietary trading by a “systemically important” financial company. The Senate bill, approved last month, calls for a study of the effects of a ban on proprietary trading and empowers a systemic risk council to put a ban into effect.
Days after Mr. Obama said in January that he wanted new financial regulations to include a ban on proprietary trading by federally insured banks, Mr. Volcker went to Capitol Hill to explain the concept.
“Every banker I speak with knows very well what ‘proprietary trading’ means and implies,” Mr. Volcker told members of the Senate Banking committee in early February.
Four months later, Congress is still debating what it means.
And the specifics? ...
Some members of the conference committee were expressing concern last week that Congress had not laid out the specifics of what Senator Richard C. Shelby called “the Volcker concept” — exactly what activity was to be allowed and what was to be forbidden.
“Despite assurances from high-ranking Treasury officials that clarity would be provided on what constitutes proprietary trading and what does not, no such clarity has been provided,” Mr. Shelby said. “This is why I call it a concept.”
If few members of Congress can agree on a definition of the Volcker Rule, even fewer have been willing to oppose its inclusion in the final version of the bill. The logic behind the ban is, for some members of Congress, more certain: banks should not be allowed to use a guarantee of government deposit insurance — indirectly financed by taxpayers — to provide themselves with cheap capital that they then use for risky trading activities.
The big banks argue that the Volcker proposal is misguided, for several reasons. Although losses at major Wall Street and banking firms were clearly driven in part by sophisticated trading operations that turned out to be far riskier than assumed, the banks assert that the financial crisis of 2008 was a lending-based crisis caused by reckless loans made to unqualified home buyers. It was not, they say, a trading crisis.
While supporters of the trading ban urge banks to get back to “plain vanilla” lending, the banks say that trading can in fact be a less risky activity.
All financial activities entail risk, said John Dearie, an executive vice president of the Financial Services Forum, which represents the 19 largest banks, insurers and other financial services companies. But between the two, he said, lending “is arguably the riskiest activity that any financial entity can engage in. It is money out the door that banks hope will be paid back.”
For all the intensity of the arguments, even the stricter version of the Volcker Rule would not greatly change the risk structure of most banks. Few banks engage in proprietary trading to any great degree, their lobbying groups insist.
Goldman Sachs has said proprietary trading accounts for about 10 percent of its revenue. Financial analysts estimate the figure is about half that for institutions with large commercial banking operations, like JPMorgan Chase and Bank of America.
And while it looks like there is considerable support for a strengthened version of the Volcker Rule, Congress did see fit to carve out a few exemptions for banks to trade for their own accounts — in government securities.
Perhaps mindful that the federal government is burdened with debt related in part to the financial crisis and its aftermath, the proposals say that banks will continue to be allowed to trade government bonds, including securities issued by Fannie Mae, Freddie Mac, Ginnie Mae and other government-sponsored enterprises.
—Sewell Chan contributed reporting.