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U.S. regulators are set to give banks an exemption from Volcker Rule limits for collateralized debt obligations composed mostly of small-bank securities, Bloomberg News reported yesterday. The adjustment to the rule would allow banks to keep CDOs backed by trust-preferred securities while limiting the level of insurance and big-bank content. After regulators approved the Volcker Rule on Dec. 10, smaller U.S. banks said that it could force them to take as much as $600 million in losses on certain CDOs held by about 300 firms. The Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission and Office of the Comptroller of the Currency said that they would consider exempting the securities and would deliver their answer by tomorrow. The exemption would grant grandfathering protection to CDOs held before last month, as long as they meet thresholds ensuring they are largely tied to securities issued by banks with less than $15 billion in assets, the people said. As an interim final rule, it can be implemented while still allowing the agencies to collect comments.

The Federal Reserve is investigating whether traders at the world’s biggest banks rigged benchmark currency rates, raising the risk that firms will be penalized for lax controls as regulators look for wrongdoing, Bloomberg News reported today. The Fed, which supervises U.S. bank holding companies, is among authorities from London to Washington, D.C., probing whether traders shared information that may have let them manipulate prices in the $5.3 trillion-a-day foreign-exchange market to maximize their profits. The Fed punished firms for internal-control lapses last year as it worked with state and federal authorities on cases involving Iranian sanctions and botched derivatives bets. The foreign-exchange inquiry looks at benchmark WM/Reuters rates used by companies and investors around the world.

U.S. banks are seeking to limit the reach of the Volcker Rule by challenging its definition of what it means to own a hedge fund or private-equity fund, Bloomberg News reported today. The opening gambit was made by the American Bankers Association, the industry’s biggest lobbying group, which said in a federal lawsuit filed last month on behalf of community banks that regulators had defined too broadly what it means to have an ownership stake. A week later, four other organizations, including the Financial Services Roundtable, sent a letter to bank-supervisory agencies making the same point. Regulators, who spent more than two years writing the rule, defined ownership broadly to capture all economic interests a firm might have in restricted funds. The ABA said that it should be narrower, focusing only on equity, and that buying debt a fund sells doesn’t qualify as ownership.

Wall Street could pay nearly $50 billion to buy peace from federal authorities who are taking aim at the banks over their role in the mortgage crisis, according to interviews and a confidential analysis of the industry’s potential legal exposure, the New York Times reported today. Bracing for a potential reckoning, the banks and their outside lawyers are quietly using JPMorgan Chase’s record $13 billion mortgage settlement in November to do the math and determine just how much each bank might have to pay to move beyond the torrent of government mortgage litigation that has dogged them since the financial crisis. If the settlements materialize, they could yield, according to analysts, $15 billion in relief for consumers — a mixture of cash payments and other assistance, like reductions in the size of homeowners’ loan payments. A payment of $50 billion, made up of a string of separate deals, would amount to roughly half the total annual profit of large American banks in 2012. The $50 billion figure does not include JPMorgan’s $13 billion payout, which means the ultimate industry tab could exceed $60 billion.

Several senators continued to lambast the size of large Wall Street banks at a hearing on Wednesday, signaling lawmaker pressure to break up or shrink big banks will not abate in the new year, Dow Jones Daily Bankruptcy Review reported today. Sen. Sherrod Brown (D-Ohio), who could rise to be chairman of the Senate Banking Committee next year, opened a subcommittee hearing on big bank subsidies Wednesday by saying it's "unacceptable" that "the largest Wall Street banks are so much larger and more concentrated than they have ever been." Sen. Elizabeth Warren (D-Mass.) said that the 2010 Dodd-Frank law has not curbed the possibility of future taxpayer bailouts of financial firms, a position backed by several academics testifying at the hearing.

To read prepared testimony from the hearing, please click here:
http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hear…

Sen. Elizabeth Warren (D-Mass.) said that she anticipates Janet Yellen will be a more aggressive financial regulator than Ben S. Bernanke when she succeeds him as chairman of the Federal Reserve Board, Bloomberg News reported today. Warren said that she is “optimistic” about Yellen’s approach to financial regulation, particularly with big banks. Yellen will take over as the Fed trims monthly bond purchases in a first step toward lessening the unprecedented economic stimulus commenced under Bernanke’s leadership. His second four-year term expires on Jan. 31.

The Justice Department has put Wall Street on notice that it plans additional enforcement actions against banks that haven't done enough to stem the flow of illicit funds into the U.S. financial system, the Wall Street Journal reported today. Banks have come under increasing pressure from regulators and law enforcement to bolster their anti-money-laundering efforts as part of a broad attempt to eradicate money laundering by going after the financial institutions they say enable such activity. Prosecutors are increasingly bringing cases under the Bank Secrecy Act, which requires financial institutions to take a range of steps to ensure customers' money doesn't come from criminal activity. The Office of the Comptroller of the Currency, which oversees the largest national banks, has begun tying deficiencies in a bank's anti-money-laundering program to its formal rating of bank management, which can form the basis for enforcement actions and affect a bank's ability to raise capital.

Lenders are poised to win concessions from central bank chiefs and global regulators over a debt limit they criticized as a blunt instrument that would penalize low-risk activities and curtail lending, Bloomberg News reported today. A revised leverage-ratio plan is set to be laxer than a draft published last year by the Basel Committee on Banking Supervision, said a person familiar with the scope of a Jan. 12 meeting of the group’s oversight body at which the measure will be discussed. The draft leverage rule published last year would have required banks to hold capital equivalent to at least 3 percent of their assets, without any possibility to take into account the riskiness of their investments. Stefan Ingves, the Basel committee’s chairman, has said that discussions in the group have focused on calibrating how banks should calculate the size of their assets, as opposed to reopening talks on the 3 percent figure.

A former private wealth adviser for a unit of Lehman Brothers Holdings Inc can keep a lucrative signing bonus he received from the firm three years before it collapsed, a securities arbitration panel has ruled, Reuters reported yesterday. Lehman lost its bid to recoup $1.8 million from William Gourd, who joined the firm in early 2005, according to a ruling this week by a Financial Industry Regulatory Authority arbitration panel. Lehman Brothers Holdings Inc. has been pursuing roughly 50 of its former licensed securities professionals to return portions of the bonuses they received when hired.

JPMorgan Chase & Co. will pay $2.6 billion to resolve criminal and civil allegations it failed to stop Bernard Madoff’s Ponzi scheme, bringing its legal settlements from the past two years to more than $29 billion, Bloomberg News reported today. JPMorgan avoided prosecution by acknowledging in an accord with the U.S. that it ignored red flags for about 15 years that Madoff used his account to run a fraud, Manhattan U.S. Attorney Preet Bharara said. The bank will pay $1.7 billion to settle the government’s charges, $350 million in a related case by the Office of the Comptroller of the Currency and $543 million to cover private claims, the firm said in a filing.