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FDIC backs ban on bank proprietary trading

WASHINGTON -- Banks would be barred from trading for their own profit instead of their clients' under a rule federal regulators proposed Tuesday.

The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote. The ban on so-called proprietary trading was required under the financial overhaul law.

For years banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out. That's what happened during the 2008 financial crisis.

The Federal Reserve has also approved a draft of the so-called Volcker Rule, named after former Fed Chairman Paul Volcker.

The Securities and Exchange Commission must still vote on it, and then the public has until Jan. 13 to comment. The rule is expected to take effect next year after a final vote by all three regulators.

A ban on proprietary trading could help President Barack Obama in next year's election by showing he has adopted tough rules to rein in risky trading on Wall Street.

A harder line with bankers might also help Obama win over protesters on Wall Street. Many believe Obama was too lenient on the banks because he continued the bailouts that had begun under President George W. Bush.

Congress and Obama had hoped the Volcker Rule would blunt such criticism. But they left most of the details for regulators to sort out. It's unclear how strictly the ban will be enforced. Under the draft, banks must hold investments for more than 60 days. Regulators determined that was enough time to limit speculative trading.

Senior and midlevel managers would be required to make sure bank employees comply with the restrictions. But the rule doesn't say what happens if they don't.

Traders should not be paid in a manner that encourages risk-taking, but the rule doesn't outline what that entails.

Wall Street banks say the ban on proprietary trading could prevent them from buying and selling investments that their customers might want.

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