Spencer Bachus, a potential Republican chairman of the House financial services committee, has fired the first salvo in a battle with regulators – warning them against harming US banks by curbing their trading activity.

In a letter sent to the Financial Stability Oversight Council, Mr Bachus says that a ban on proprietary trading – known as the Volcker rule – that was included in the new Dodd-Frank financial reform law will “impose substantial costs on the American economy and market participants” with “doubtful” benefits. “Depending on how US regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from US banks to banks based abroad,” he said in the letter obtained by the Financial Times. He highlighted UK-based institutions as possible beneficiaries.

Underlining the change in Congress, Mr Bachus, who as ranking Republican on the committee could replace Barney Frank as chairman of the panel, expressed concern that shareholders of Goldman Sachs and JPMorgan Chase will be hurt because the banks will be less profitable.

Mr Bachus has served as senior Republican on the committee and was widely expected to inherit the chairmanship. But on Wednesday night Ed Royce, another Republican congressman, announced he would compete for the job.

The proprietary trading ban, named after Paul Volcker, the former Federal Reserve chairman who proposed it, was opposed by most Republicans when it was passed by Congress in June. It also restricts banks’ investments in hedge funds and private equity firms.

Regulators have a great deal of latitude in defining how strict the ban should be. Mr Volcker and some Democratic senators are urging a broadly defined ban but the elections gave Mr Bachus new clout in his push for a looser approach.

The Financial Stability Oversight Council, whose members include Tim Geithner, Treasury secretary, and Ben Bernanke, Fed chairman, is this week asking for public comments on how the rules should be written.

Meanwhile, there was talk on Wednesday that Mr Frank, co-author of the law, could leave the House following his party’s defeat in the midterm elections. Christopher Whalen, analyst at Institutional Risk Analytics, suggested Mr Frank may already have been lined up as chairman of the new Consumer Financial Protection Bureau.

But three people close to Mr Frank, who saw off a Republican rival to hold his seat in Massachusetts and was unavailable for comment on Wednesday, dismissed the idea. They said he was planning to defend his reform against challenges from Republicans, who have previously vowed to either repeal or defund parts of the law.

Mr Bachus told the FT that he would go “page by page . . . to identify job-killing provisions or lending-killing provisions”. He highlighted new rules pushing over-the-counter derivatives trading through clearing houses and on to exchanges as a problem for non-financial corporate users.

“The derivatives provisions in Dodd-Frank alone…as they stand now they’re going to take a trillion dollars out of our economy. Think how many jobs that’s going to kill,” he said.

The figure comes from the International Swaps and Derivatives Association, which claims the cost arises from the potential for higher margin and liquidity requirements.

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