'Volcker rule' ban on risky trades passed by regulators
All five US financial regulators have approved the Volcker rule, designed to restrict the finance industry in the wake of the 2008-09 financial collapse.
Named after former Federal Reserve chairman Paul Volcker, it bans banks from using their own funds for trading activities.
It is considered the centrepiece of the 2010 banking reform legislation known as Dodd-Frank.
Banks will have until 21 July 2015 to comply with the rules.
The five agencies ruling on the measure are: the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission (SEC), which voted the measure through by a vote of 3-2, and the Commodities Futures Trading Commission, which passed the rule by 3-1.
Although the Volcker rule was passed as part of the Dodd-Frank legislation in 2010, it has faced difficulties in implementation, mostly due to opposition from the banking industry.
US President Barack Obama applauded the passage of a rule proposed more than three years ago.
He said in a statement: "The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm's practices."
Paul Volcker, the architect of the measure, said he hopes it will "help the process of restoring trust and confidence in commercial banking institutions."
"It is after all those institutions which benefit from explicit and implicit public support that we count on to provide a strong, safe, and effective financial system," he continued, referring to tax payer bailouts during the financial crisis.
Long time coming
While the bare bones of the Volcker rule have been known for some time, the specifics of its implementation were unveiled for the first time on Tuesday ahead of the vote.
Stretching to 800 pages, at its core, the rule imposes a strict ban on so-called "proprietary trading", which is when banks use their own funds to make trades.
Although banks had been hoping for a less strict interpretation of the rule, recent trading debacles, including JP Morgan's "London whale" loss, seemed to have led to a stronger measure.
Banks have argued that the rule is too comprehensive and makes it difficult to distinguish between trades made for profit and those done simply to hedge against risk.
"This is the era of 'big brother' banking, where the fortunes of banks are tied to the government like never before," Credit Agricole banking analyst Mike Mayo told the BBC.
"Big brother was asleep on the couch before the financial crisis and now big brother seeks to micromanage the banks as a means to prevent future crises, [but] how can anyone in mid-level management really understand a proprietary trade?"
In addition to banning proprietary trading, the Volcker rule also imposes restrictions on how and when banks invest in hedge funds and private equity.
'Make banks boring'
Those looking for stricter market regulation cheered the news.
"[Mr] Volcker himself noted that it's time to make banks boring again. And I think that that's actually correct," Dan Alpert of Westwood Capital told the BBC.
Although banks have been preparing for some time, the stricter-than-expected rules could still hurt profits in the near term.
Proprietary trading was once a big profit generator for banks, and a Standard & Poor's analysis found that even a significantly weakened rule could cost the big eight US banks $2-3bn a year in foregone earnings.
If a more strict rule is established, it could cost them $8-$10bn a year.
It could also further damage Wall Street's ability to compete with overseas markets, unless similar rules are adopted around the globe.
"It will make US banks safer, if the rest of the world goes along with it, then I think it'll make the banking industry safer, but the interlocking aspects of international banking trade are very, very much a threat," said Mr Alpert.
Although individual banks are not expected to sue to stop the implementation of the Volcker rule, some analysts expect that industry groups, such as the US Chamber of Commerce, might engage in litigation to block the measure.
"We are disappointed that regulators may have sacrificed an effective process that could have avoided adverse consequences for Main Street businesses," said the US Chamber of Commerce's David Hirschmann in a statement.
"The Chamber asked regulators to re-propose the Volcker Rule in order to identify and fix unintended consequences before the Rule goes into effect."