(Bloomberg) -- Investors paid the most in a year this month to hedge against swings in U.S. financial shares amid speculation that increased regulation and a reduction in Federal Reserve stimulus will hurt revenue.

Concern is increasing that earnings growth will slow after this month’s release of the Volcker Rule, a measure that bars financial institutions from taking excessive risks with depositor money, Robert Pavlik of Banyan Partners LLC said. Profits may also be squeezed after the Fed last week reduced bond buying under its quantitative easing program.

New rules for trading, clearing and business conduct are being created under the 2010 Dodd-Frank Act designed to prevent a repetition of the 2008 financial crisis. Regulators can interpret the Volcker Rule to decide whether firms are engaging in permitted market-making rather than proprietary trading.

Banks will need to charge more for lending to get a “fair return,” as they will face growing expenses tied to regulation that includes limits on trading, hedging and investing, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said Dec. 11. Expenses will be higher and returns lower, he said.

Fed Chairman Ben S. Bernanke’s announcement in May that the central bank was considering reducing its monthly bond purchases has also affected lenders. Citigroup Inc., which relied on its fixed-income business for about 20 percent of revenue last year, said in October that bond trading dropped 26 percent in the third quarter.

Morgan Stanley’s fixed-income sales slumped 43 percent in the period, while Bank of America Corp.’s fixed income, currency and commodities sales and trading division lost 20 percent. Revenue at Goldman Sachs Group Inc.’s bond trading fell 47 percent in the third quarter for the worst fixed-income results since the financial crisis.

Spokesmen at JPMorgan, Citigroup, Morgan Stanley and Goldman Sachs declined to comment on the options trading. Bill Halldin of Bank of America didn’t reply to an e-mail seeking comment sent after normal business hours.

Lenders including JPMorgan, Morgan Stanley and Goldman Sachs either shut or broke off proprietary trading desks before the Volcker Rule publication. Wells Fargo said on Dec. 10 that approval of the rule would not have a material impact on its financial results because proprietary trading is not a significant part of its business.

Compliance Policy

Central Bank Chiefs to Weigh Debt Rule Changes Amid Bank Outcry

Central bankers from around the world will meet next month to discuss whether to scale back their plans for a debt limit that banks say will force them to rein in lending.

Bank of England Governor Mark Carney has said that central bank and regulatory chiefs will meet in Basel in January “to come to an agreement, an international agreement, on the definition” of the debt-limit rule, known as a leverage ratio. The meeting will take place on Jan. 12, according to three people with knowledge of the plans.

The revised policy may be diluted compared with a draft published earlier this year by the Basel Committee on Banking Supervision, one of the people said, without giving further details. The draft rule would require banks to hold capital equivalent to at least 3 percent of their assets, without any possibility to take into account the riskiness of a lender’s investments.

A quarter of large global banks would have failed to meet the draft version of the leverage limit had the rule been in force at the end of last year, according to data published by the committee in September. Some supervisors have called for more reliance on leverage ratios instead of standard Basel capital requirements, which are measured as a ratio of banks’ equity against risk-weighted assets, because some banks are inconsistent in the way they measure that.

Under the Basel timetable, banks will be expected to publicly disclose how well they measure up to the standard from 2015, with the rule to become a binding minimum standard in 2018.

Fed Proposes Limits on Emergency Lending Under Dodd-Frank

The Federal Reserve is proposing changes required by the Dodd-Frank Act of 2010 to regulations governing its ability to extend emergency lending to struggling financial firms.

“The proposed rule is designed to ensure that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid an individual failing financial company,” the Fed said yesterday in a statement.

The Fed will take comments until March 7 on its proposal, which meets a requirement of Dodd-Frank, the regulatory overhaul enacted after a financial crisis that saw the central bank extend billions of dollars in assistance to banks. In an effort to reduce chances that taxpayer money could be used to rescue failing companies, the law narrowed the Fed’s ability to extend a liquidity lifeline -- as was done with Bear Stearns Cos. and American International Group Inc. in 2008.

The Fed proposal was written with input from the Treasury Department. The treasury secretary would have to approve any future use of the new authority, according to the proposal. Dodd-Frank replaced the government’s individual-company emergency interventions with new demands on the banks to strengthen capital, reduce risky behaviors and prepare for their own hypothetical failures.

In a Nov. 14 report, the Government Accountability Office urged the Fed to finish the new emergency-lending procedures, noting the agency had “not completed its process for drafting the required procedures or set time frames for doing so.”

The study had been requested by Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, who asked the GAO to examine benefits banks receive from the government.

Compliance Action

Swiss Banks Hire Army of Advisers to Weigh U.S. Amnesty Plan

Switzerland’s 300 banks have enlisted an army of auditors, lawyers and in-house workers as they race to meet a Dec. 31 deadline on whether to seek U.S. amnesty for helping American clients evade taxes.

Banks in Switzerland, the largest cross-border financial center with $2.2 trillion of assets, are closely examining accounts before joining a disclosure program that’s the broadest assault in a five-year U.S. crackdown on offshore tax evasion.

Banks with “reason to believe” they violated tax laws can ask the Justice Department to forgo prosecution. In turn, banks must disclose how they helped Americans hide assets, hand over data on undeclared accounts and pay penalties. Those that don’t apply could face criminal probes like those against 14 banks, including Credit Suisse Group AG, HSBC Holdings Plc and Basler Kantonalbank.

The Swiss government encourages banks to join the program, announced Aug. 29. The Swiss Bankers Association criticizes the program’s cost and vexing questions, the answers to which can result in penalties.

At least 33 have announced they will join some form of the program, including 19 cantonal lenders typically owned by regional governments.

Banks expressed confusion over how the Justice Department will calculate penalties and treat lenders that are less culpable in hiding assets from the Internal Revenue Service, said Joshua Milgrim, an attorney at Dechert LLP.


CFPB, DOJ File 1st Joint Lawsuit to Enforce Fair-Lending Laws

The U.S. Consumer Financial Protection Bureau’s proposed $35 million settlement with PNC’s National City Bank to resolve allegations of charging higher prices on mortgage loans to black and Hispanic borrowers “makes clear” that lenders will be held accountable for “discriminatory practices,” CFPB Director Richard Cordray said in statement.

The bureau filed a complaint and proposed resolution yesterday along with the Justice Department. Under the terms of settlement, which are subject to court approval, National City would pay $35 million in restitution to more than 76,000 borrowers harmed between 2002 to 2008.

National City was bought by PNC at end of 2008.

Yesterday’s action marks the first joint lawsuit brought in federal court by the CFPB and Justice Department to enforce federal fair-lending laws, according to CFPB. The complaint isn’t a finding or ruling that the defendants have actually violated the law.

Halkbank Says Role in Iran Gold Trade Legal After CEO Arrest

Turkiye Halk Bankasi AS, the state-run bank that slumped 19 percent since a graft probe implicating four ministers erupted last week, said it has acted lawfully after police arrested its chief executive officer.

Payments made by the bank on behalf of companies exporting gold to Iran were transparent and traceable, Halkbank said in a filing to the Istanbul bourse yesterday. There were no rules against trading precious metals with Iran until July 1 and the bank ceased the transactions on June 10 after it became public that the U.S. planned new sanctions, it said.

Turkish police apprehended CEO Suleyman Aslan, the sons of three cabinet ministers and scores of others in three overlapping probes targeting corruption in government tenders, money laundering and gold smuggling. Prime Minister Recep Tayyip Erdogan’s government purged at least 60 police chiefs in response.

Aslan was formally arrested earlier this week after authorities found $4.5 million inside shoeboxes at his house, Hurriyet newspaper said last week. The money was to be donated to building Islamic schools in Turkey and Macedonia, he said, according to the newspaper.

Halkbank, Turkey’s largest listed state-run bank, was authorized by the U.S. to trade with Iran before the sanctions were introduced, and was the main bank used for purchases by Turkey of gas and oil from Iran.


Liquidity Requirements Preferable to Capital Rules, NY Fed Says

Liquidity requirements are preferable to capital rules, two analysts at the Federal Reserve Bank of New York said.

Tightening liquidity requirements brings lower likelihood of “systemic distress without impairing consumption growth,” New York Fed economists Tobias Adrian and Nina Boyarchenko wrote in a paper.

The paper looks at the interaction of liquidity and capital regulations “with the supply of risk-free assets.”

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