Views on improving the integrity of global capital markets
02 November 2011

Volcker Rule: Wherefore Art Thou?

Taking up but a mere 10 pages in the Dodd-Frank Act, the so-called Volcker Rule has morphed into a regulatory proposal just shy of 300 pages. What happened between former Fed Chairman Paul Volcker’s suggestion that banks eliminate risky trading for their own accounts and the proposal that raises more than 1,300 questions on almost 400 topics? Upon issuance of the proposal in mid-October, even Mr. Volcker expressed his discontent, noting publicly “I don’t like it, but there it is.”

It’s an all-too-familiar scenario: What starts as a relatively straightforward idea to address a certain practice perceived as harmful to investors ends up — through the various machinations of regulatory wordsmiths and lawyers (what was that line by Shakespeare?) — unbelievably convoluted. In this case, a cursory review finds exceptions to the exemptions from the prohibitions of the actual rule, leading a number of banks to protest that it is now too complex to decipher, much less implement.

Intended to stem risky investments by banks, the proposal prohibits insured depository institutions and their affiliates (1) from engaging in certain “proprietary trading”; and (2) from acquiring or retaining an ownership interest in or “sponsoring” hedge or private equity funds. While most nonbank financial institutions may not be subject to direct prohibitions of the regulations, they may still have additional capital requirements. Not only will the prohibitions apply to U.S. banks, they will also affect a number of foreign banks that have banking operations in the U.S. To date, the proposal sets forth the most restrictive prohibitions of this kind in any of the major markets.

Cost Is Still a Big Question
What is clear from the proposal, which has been jointly issued by the Federal Reserve, FDIC, SEC, and OCC (with the CFTC expected to follow shortly), is that it has sparked a debate about the relative costs and benefits among various factions.

Proponents say that implementation will significantly decrease the call for future bailouts and restore a more balanced and traditional banking function. The chairman of the SEC has said that it will help reduce conflicts of interest between banks and their customers, as well as shore up the stability of the U.S. financial system.

Among the objections voiced so far — besides the major one about the girth and complexity of the rule itself — are the projected $1 billion in new costs to banks (approximately $917 million in capital and $50 million in annual compliance and legal costs), the projected consumption of future man hours dedicated solely to compliance functions, and the lack of proof that the lack of these restrictions actually led to the financial meltdown of 2008-2009. More than one person has called for a return to a Glass-Steagall Act-type regulatory framework, in lieu of a new rule.

Growing Political Divide
Even though Congress passed the Dodd-Frank Act containing the legislative basis for the Volcker Rule, opponents of the sweeping financial reform law have been quick to start their rounds of questioning and push-back. Moreover, the concerns have prompted the Republican majority in the House Financial Services Committee to schedule hearings later this month to evaluate the cost and projected effect on competitiveness issues.

Comments by the public on the proposal are due by 13 January 2012. Start your reading early and plan to stay up late. With 300 pages ahead, you’ll also need to keep that good reading light burning.


About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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