Former Federal Reserve Chairman Paul Volcker on Monday issued a broad defense of a federal rule bearing his name that would prohibit banks from trading for their own profit.
Commercial banks backed by government deposit insurance shouldn't be able to engage in speculative trading, Volcker said in a letter supporting the so-called Volcker rule.
"Proprietary trading is not an essential commercial bank service that justifies taxpayer support," he wrote.
The letter was sent to the five regulatory agencies that have approved a draft version of the rule, including the Federal Reserve and the Securities and Exchange Commission.
The rule is expected to be finalized by summer. Banks will then have until July 2014 to comply.
Congress directed regulators to draft the rule under the 2010 financial overhaul. It was a response to bets banks had placed on mortgage-backed securities, which hastened the financial crisis and led to taxpayer-funded bailouts.
Wall Street executives have opposed the rule. They say it would limit trading on behalf of customers and put them at a disadvantage with non-U.S. banks, which aren't subject to the ban.
Banks, financial services trade groups and individuals have submitted hundreds of comments in opposition. Monday was the deadline for comments.
Tim Ryan, a lobbyist for the securities industry, called the rule "unworkable" and said it will slow economic growth.
The industry says the rule will reduce trading volumes, or the "liquidity" of stocks, bonds and other instruments. Banks won't be able to trade with their own money and will likely cut back on trading for their customers to avoid running afoul of the rule. Lower trading will reduce demand for stocks and other securities, cutting into their prices.
Members of Congress from both parties have echoed the industry's criticism. About 120 members of the House signed a letter asking regulators to drop the current proposal and draft an entirely new rule.
Volcker disagreed. He noted that excessive liquidity can increase risk by encouraging more trading.
"The restrictions ... are not at all likely to have an effect on liquidity inconsistent with the public interest," Volcker wrote.
Regarding the industry's concerns about competition from overseas, Volcker wrote that they seem "superficial at best." The rule's bar on trading could make U.S. banks more appealing to many customers, he wrote.
Volcker indicated that small banks should be subject to less scrutiny under the rule. The vast majority of proprietary trading is done by a handful of large banks, he noted.
"At the end of the day, I feel confident that the restrictions imposed by the `Volcker Rule' can be reasonably and effectively administered," he wrote.