Banks Have Two Years to|Ditch Risky Investments

WASHINGTON (CN) - Banks have two years to get rid of risky investments, starting April 1, according to new Federal Reserve rules.

The rules flesh out compliance with Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Volcker Rule.

The Board of Governors of the Federal Reserve System may grant an additional three years to banks that are invested in hedge funds and other investment vehicles considered "illiquid" because contractual obligations prohibit the banks withdrawing their investment before a specified maturity date.

Only "illiquid" positions held before the Feb. 14 publication of the new rule in the Federal Register are eligible for an extension of the conformance period.

Named after former Fed Chairman Paul Volcker, the rule prohibits banking entities from making speculative investments on their own behalf, or from owning an interest in, or sponsoring, a hedge fund or private equity fund.

The rule is intended to limit the exposure of banks, and by extension the public, exposed, through federal protections, to credit-default swaps and other types of high risk investments that helped bring on the collapse of the financial services sector in 2007.

Separately, the rule also prohibits a banking entity that advises, manages or sponsors a hedge fund or private equity fund from entering into any transaction with the fund. This eliminates financial incentives for banking entities to place outside bets on positions held by funds they advise.

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