Regulators Plan to Ease Controversial Volcker Rule

Much anticipated regulatory relief for US banks may be on the way

Federal Reserve Board Chairman Jerome Powell testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill in Washington, DC, Feb. 27, 2018. Chip Somodevilla/Getty Images

WASHINGTON—U.S. regulators are planning to make changes to the controversial Volcker rule that could save Wall Street billions of dollars, according to a Reuters report. The changes would reduce the compliance burden and give banks more flexibility in trading on their account.

The Volcker rule is a provision in the Dodd-Frank Act, a massive compilation of banking regulations enacted in 2010 by the Obama administration. The provision prohibits banks from engaging in risky market bets and limits their relationships with hedge funds and other private funds.

Modifications to the Volcker rule that are being considered include repealing the assumption that short-term trades are proprietary unless banks prove otherwise. In addition, the changes would bring more clarification on the types of funds that banks are banned from investing in, and exempt some foreign funds from the ban.

Congress is also working on a bill that would exempt small banks with assets under $10 billion from the Volcker rule, stated the same report.

“We’re taking a fresh look at the Volcker rule,” said Jerome Powell, the new chairman of the Federal Reserve, in his testimony before Congress on Feb. 27.

The expected modification may also simplify the spaghetti-like financial regulatory structure and appoint a lead regulator to oversee the rule’s enforcement.

At the moment five regulators—the Fed, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission—have joint responsibility for enforcing the rule.

The Volcker rule, which runs more than 1,000 pages, is a significant burden for the financial industry, according to experts. And it has indeed failed to eliminate banks’ risky transactions, critics say.

Despite the rule, the top five U.S. banks have an interdependent relationship with their hedge fund and private equity clients, stated Robert Wilmers, chairman and CEO of M&T Bank, in the bank’s 2015 annual report. Wilmers died in December 2017.

These funds depend on large banks’ balance sheets to increase leverage and boost returns—and they pay hefty fees to large banks in return, stated Wilmers in the report.

A former banker and a senior executive at a private equity firm, who wished to remain anonymous, told The Epoch Times that banks, hedge funds, and private equity firms are still using the products Dodd-Frank was supposed to eliminate but now create more complex structures to mask their activities.

“They haven’t gone away; they’ve just gotten more complicated to circumvent the regulation. So banks pay huge fees to lawyers and consultants to help structure these deals,” he said.

Impact on Community Banks

The Volcker rule is a burden for community banks as well. However, exempting them from this burden is not the only regulatory relief small banks need.

“The Volcker Rule neither favors nor disfavors community banks. It prohibits all FDIC-insured banks and their affiliates from investing in hedge funds,” Thomas Hoenig, vice chairman of the FDIC stated in an article in American Banker.

While many community banks have raised concerns about regulatory burdens, the Volcker Rule is not one they highlight, he wrote.

Community banks play a critical role in the U.S. economy by offering a large amount of consumer, residential mortgage, and small business loans.

Over-regulation, following the 2008 financial crisis, has made it harder for community banks to operate, and the number of small banks has dropped as a result of consolidation or bank failures.

Small banks lost their ability to compete with the larger banks due to increased regulatory demands and capital requirements, making it harder for them to serve their communities profitably.