There is a good chance that a sweeping U.S. financial reform bill will be passed in a "reasonable form," White House economic adviser Paul Volcker said, adding the bill could provide a basis for international coordination on coherent legislation.
The Senate version of the bill includes the substance of his proposed "Volcker rule" curbing risky practices by banks, though caution is needed to prevent changes that could limit its effectiveness, he said.
"This is a battle. Make no mistake about it," the former Federal Reserve chairman said at a conference here.
"But I do think that if we can get this bill passed in a reasonable form — and the prospects to me look pretty good — I think that we'll provide a basis for the other major countries to get together in a way that wasn't possible before.
"I hope that we will see progress among the other major financial markets anyway in adopting legislation that fits in coherently with the American approach," Volcker said at an International Economic Forum of the Americas conference.
The Volcker rule now being debated by U.S. lawmakers would ban risky proprietary trading unrelated to customers' needs at banks that receive government backing; bar banks from sponsoring hedge funds and private equity funds, and limit big banks' future growth through a new cap on market share.
New tensions surfaced over the proposed regulation this week after Volcker said in a letter obtained by Reuters that he firmly opposes exemptions to his rule being sought by banks that say they make only small investments in private equity and hedge funds.
The Senate version of the bill endorses the Volcker rule, but permits market-making and customer facilitation. Democrats have moved to toughen it by reducing the latitude given to regulators in implementing it once it becomes law, which now appears all but certain.
All this comes as a U.S. congressional conference committee prepared for its first meeting on crafting a final version of the bill — the largest banking revamp since the 1930s.
There is no basis yet for "business as usual" in U.S. and European financial markets, despite some economic growth over the last year, Volcker told the conference.
The Volcker rule, unveiled in January, threatens the profits of such banks as Morgan Stanley and Goldman Sachs Group, and could indirectly impact private equity firms and hedge funds.
"I think it's net neutral, maybe even net marginally not good" for hedge funds as the Volcker debate unfolds, Todd Groome, chairman of the global hedge fund group Alternative Investment Management Association, said in an interview.
"I could see some seed capital being less available; I could see some human institutional support for start-ups less available; that's not a good thing. And I could see more acquisition capital not being available in the fund-of-funds and hedge fund world," Groome said on the sidelines of the IOSCO conference, also in Montreal.
The two U.S. financial regulation bills that must be merged include new rules for hedge funds and credit rating agencies, among other aspects of the financial system.
Volcker said the proposed rules for credit agencies were not satisfactory. He also said that U.S. and international accounting standard setters must reach an agreement on how banks value the loans on their books.
The International Accounting Standards Board has proposed to have those assets valued at "amortized cost," which would mostly provide information about expected cash flows.
Meanwhile, the U.S. Financial Accounting Standards Board has suggested that all financial instruments be valued at market levels — or "mark-to-market" — an idea opposed by the banking industry.
"What appeared to be two organizations converging ... now looks like a collision," Volcker said at IOSCO. "I hope they can come together by the end of the year."
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