In an effort to make financial regulation more airtight, a government oversight panel has recommended a new wrinkle: that bank chiefs should personally guarantee their firms' compliance.
Under the proposed guideline, chief executives would have to promise publicly to follow the so-called Volcker rule, which limits banks' ability to make trades for their own account, Bloomberg reports. The proposed "public attestation," part of a study released this week by the Financial Stability Oversight Council, could prove to be an elegant way of enforcing a rule that regulators have struggled to implement, or even define.
"CEOs will not like this," said analyst Paul Miller, a former examiner for the Philadelphia Fed, according to Bloomberg.
Last year's Dodd-Frank financial reform addressed the practice of proprietary trading, which enables taxpayer-backed banks to profit by making trades on their own behalf. Experts have said the practice, which can saddle banks with big risks, contributed to the financial crisis.
Figuring out how to curb prop trading, though, hasn't been easy. For starters, Dodd-Frank didn't actually ban the practice outright. It allowed banks invest the equivalent of 3 percent of their capital in hedge funds and private equity funds. In practice, that amount may be even higher.
Paul Volcker, for whom the rule was named, was reportedly disappointed with its final version.
"I'm a little pained that it doesn't have the purity I was searching for," he said, according to The New Yorker.
As regulators write the rules that give Dodd-Frank its teeth, they've struggled with the wording of the prop trading limit. Volcker, for his part, has recommended that it be as broad as possible, to allow no wiggle room. But even in such a case, banks might find loopholes. As author and columnist Michael Lewis has pointed out, banks could disguise proprietary trades by claiming to be making them on behalf of a client.