In order to comply with the Volcker Rule related to banks’ restrictions on proprietary trading, Bank of America Corp. (BAC) is laying off one third of its employees from the proprietary-trading desk, the New York Times reported on Wednesday. About 20 to 30 proprietary traders are expected to be eliminated by this decision.
 
The Volcker Rule, named after Paul Volcker, a former Federal Reserve chairman who advises the Obama administration, restricts proprietary trading, private equity and other investments. A provision in the Dodd-Frank financial overhaul legislation passed in July, the Volcker Rule curbs the ability of banks to involve in bets with their own money.
 
The Dodd-Frank Act was an effort to reduce many of the practices that led the U.S. economy into its worst state since the 1930s. Though the law, the most sweeping financial reform since the Great Depression, gives the government more power to tighten regulations for companies that threaten the economy, this may become a significant threat to profitability for the country’s biggest banks in the near to mid term.
 
The BofA traders will be eliminated in New York, London, Hong Kong and other cities. However, some of the affected employees are expected to be absorbed within the bank.
 
BofA’s contraction of its proprietary trading desk follows similar actions by peers including Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM). For Goldman, proprietary trading has been a major contributor to its profitability. However, recently, the company decided to shut down its principal-strategies unit that handles proprietary equities trading. This will force it to lay off about 60 employees. JPMorgan too has decided to close all of its proprietary trading. JPMorgan will eliminate 20 proprietary traders and shift the other employees to its asset management division. Morgan Stanley (MS), however, will take a while to close its main proprietary trading unit as it has a lower exposure to proprietary trading.
 
BofA currently retains its Zacks #3 Rank (short-term Hold rating), implying that the stock is expected to perform in line with the broader U.S. equity market in the near term.
 
Though BofA is poised to benefit from its large scale operations, strong capital position and balance sheet restructuring, concerns related to inconsistent credit quality and the impact of tighter regulations of the new financial reform law linger. Therefore, we maintain our long-term Neutral recommendation on the stock. 
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
MORGAN STANLEY (MS): Free Stock Analysis Report
 
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