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Volcker Rule

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Paul Volcker

The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.[1] Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.[2][3] The rule's provisions were scheduled to be implemented as a part of Dodd-Frank on July 21, 2012,[4] with preceding ramifications.[5]

Background

Volcker was appointed by President Barack Obama as the chair of the President's Economic Recovery Advisory Board on February 6, 2009. President Obama created the board to advise the Obama Administration on economic recovery matters.[6] Volcker argued vigorously that since a functioning commercial banking system is essential to the stability of the entire financial system, for banks to engage in high-risk speculation created an unacceptable level of systemic risk.[7] He also argued that the vast increase in the use of derivatives, designed to mitigate risk in the system, had produced exactly the opposite effect.[8]

Proposal

The Volcker Rule was first publicly endorsed by President Obama on January 21, 2010.[9][10] The proposal specifically prohibits a bank or institution that owns a bank from engaging in proprietary trading that is not at the behest of its clients, and from owning or investing in a hedge fund or private equity fund, and also limits the liabilities that the largest banks can hold.[11] Under discussion is the possibility of restrictions on the way market making activities are compensated; traders would be paid on the basis of the spread of the transactions rather than any profit that the trader made for the client.[12]

On January 21, 2010, under the same initiative, President Obama announced his intention to end the mentality of "Too big to fail."[11]

In a February 22, 2010 letter to The Wall Street Journal, five former Secretaries of the Treasury endorsed The Volcker Rule proposals.[13] As of February 23, 2010, the US congress began to consider a weaker bill allowing federal regulators to restrict proprietary trading and hedge fund ownership by banks, but not prohibiting these activities altogether.[9]

Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, introduced the main piece of the Volcker Rule – its limitations on proprietary trading – as an amendment to the broader Dodd-Frank financial reform legislation that was passed by the United States Senate on May 20, 2010. Despite having wide support in the Senate, the amendment was never given a vote. When the Merkley-Levin Amendment was first brought to the floor, Senator Richard Shelby, Republican of Alabama, objected to a motion to vote on the amendment.[14] Merkley and Levin responded by attaching the amendment to another amendment to the bill put forth by Senator Sam Brownback, Republican of Kansas. Shortly before it was due to be voted upon, Brownback withdrew his own amendment, thus killing the Merkley-Levin amendment and the Volcker Rule as part of the Senate bill.[15]

"Dodd–Frank Wall Street Reform and Consumer Protection Act" created the The Financial Stability Oversight Council who did a study:

United States: FSOC Publishes Volcker Rule Study Financial Services Alert - Developments of Note - Part 1 26 January 2011

FSOC Publishes Volcker Rule Study The Financial Stability Oversight Council (the "FSOC") published its "Study and Recommendation on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds" (the "Study"). The Study, which was mandated by Section 619 of the Dodd-Frank Act, provides the federal banking agencies, the SEC, and the CFTC (collectively, the "Agencies") with recommendations that the Agencies must consider (but are not obligated to follow) in developing regulations to implement the Volcker Rule. The Agencies are required to adopt such regulations no later than nine months after the FSOC's completion of the study, meaning the regulations must be adopted by October 18, 2011. http://www.goodwinprocter.com/~/media/Files/Publications/Newsletters/Financial%20Services%20Alert/2010/20100728.pdf

This proposal made it into the final legislation when the House-Senate conference committee passed a strengthened version of the rule that included the language prepared by Senators Merkley and Levin. The original Merkley-Levin amendment and the final legislation both covered more types of proprietary trading than the original rule proposed by the administration. It also banned conflict of interest trading. Senator Levin commented on the importance of that aspect: "We are also pleased that the conference report includes strong language to prevent the obscene conflicts of interest revealed in the Permanent Subcommittee on Investigations hearing with Goldman Sachs. This is an important victory for fairness for investors such as pension funds and for the integrity of the financial system. As the Goldman Sachs investigation showed, business as usual on Wall Street has for too long allowed banks to create instruments which are based on junky assets, then sell them to clients, and bet against their own clients by betting on their failure. The measure approved by the conferees ends that type of conflict which Wall Street has engaged in."[16]

However, conferees changed the proprietary trading ban to allow banks to invest in hedge funds and private equity funds at the request of Senator Scott Brown (R-Mass.), whose vote was needed in the Senate to pass the bill.[17] Proprietary trading in Treasurys, bonds issued by government-backed entities like Fannie Mae and Freddie Mac, as well as municipal bonds is also exempted.[18][19]

Since the passage of the Financial Reform Bill, many banks and financial firms have indicated that they don't expect The Volcker Rule to have a significant impact on their profits.[20]

Implementation

Public comments to the Financial Services Oversight Council on how exactly the rule should be implemented were submitted through November 5, 2010.[21] Financial firms such as Goldman Sachs, Bank of America, and JPMorgan Chase & Co. posted comments expressing concerns about the rule.[22] Republican representatives to Congress have also expressed concern about the Volcker Rule,[23] saying the rule's prohibitions may hamper the competitiveness of American banks in the global marketplace, and may seek to cut funding to the federal agencies responsible for its enforcement.[22] Incoming Chairman of the House Financial Services Committee, Representative Spencer Bachus (R-Alabama), has stated that he is seeking to limit the impact of the Volcker Rule, although Volcker himself has stated that he expects backers of the rule to prevail over such critics.[24]

Regulators presented a proposed form of the Volcker Rule for public comment on October 11, 2011, which was approved by the SEC, The Federal Reserve, The Office of the Comptroller of the Currency and the FDIC.[25] The proposed regulations were immediately criticized by banking groups as being too costly to implement, and by reform advocates for being weak and filled with loopholes.[4][26] On January 12, 2012 CFTC (the U.S. Commodity Futures Trading Commission) became the final major regulator to vote in favor of the bill.

Volcker himself stated that he would have preferred a simpler set of rules: “I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”[27]

Regulators gave the public until February 13, 2012 to comment on the proposed draft of the law (over 17,000 comments were made).[28] Under the Dodd-Frank financial reform bill, the regulations went into effect on July 21, 2012. However, during his report to Congress on February 29, 2012, Federal Reserve Chairman Ben S. Bernanke said the central bank and other regulators would not meet that deadline.[28]

As of February 26, 2013, the rule was still not implemented.[29] Occupy the SEC filed a suit in the Eastern District Court of New York naming the Federal Reserve, the SEC, CFTC, OCC, FDIC, and the U.S. Department of the Treasury and calling for the court to set a deadline for implementation.[30] Subsequently, it was reported that the Volcker Rule was not likely to be in effect until July 2014 and that some industry lobbyists were pushing for extension beyond that date.[31]

Ongoing regulatory debate in the US and the European Union

Mainland European scholars and lawmakers have also discussed the necessity of banking reform in light of the current crisis, recommending the adoption of specific regulations limiting proprietary trading by banks and their affiliates- notably in France where SFAF and World Pensions Council (WPC) banking experts have argued that, beyond fragmented national legislations, such rules should be adopted and implemented within the broader context of Pan-European statutory laws valid across the European Union.[32][33]

The Liikanen report or Report of the European Commission’s High-level Expert Group on Bank Structural Reform is a set of recommendations due to be published in September 2012 by a group of experts led by Erkki Liikanen, governor of the Bank of Finland and ECB council member. The "Liikanen Group" was molded after the UK’s Independent Commission on Banking and the President’s Council on Jobs and Competitiveness: it was established in Brussels by EU Commissioner Michel Barnier in February 2012.[34]

On July 25, 2012, former Citigroup Chairman and CEO Sandy Weill, considered one of the driving forces behind the considerable financial deregulation and “mega-mergers” of the 1990s, surprised financial analysts in Europe and North American by “calling for splitting up the commercial banks from the investment banks. In effect, he says: bring back the Glass-Steagall Act of 1933 which led to half a century, free of financial crises.” [35]

Impacts

The proposed Volcker Rule has led to an exodus of top proprietary traders from large banks to form their own hedge funds or join existing hedge funds including Todd Edgar and Roger Jones from Barclays,[36] Sutesh Sharma from Citigroup, George "Beau" Taylor and Trevor Woods from Credit Suisse, Pablo Calderini, Nelson Saiers and Boaz Weinstein from Deutsche Bank,[37] Pierre-Henri Flamand, Bob Howard,[38] and Morgan Sze from Goldman Sachs, Deepak Gulati and Mike Stewart from JP Morgan, Peter Muller from Morgan Stanley, and Jean Bourlet from UBS.[39][40] Critics of the rule have pointed to the subsequent brain drain of top talent.

Historical antecedents

The Volcker Rule has been compared to, and contrasted with, the Glass–Steagall Act of 1933.[41] Its core differences from the Glass–Steagall Act have been cited by scholars as being at the center of the rule's identified weaknesses.[42]

See also

References

  1. ^ David Cho, and Binyamin Appelbaum (January 22). "Obama's 'Volcker Rule' shifts power away from Geithner". The Washington Post. Retrieved 13 February 2010. {{cite news}}: Check date values in: |date= (help)
  2. ^ "Prop Trading and the Volcker Rule". Retrieved 2011-09-28.
  3. ^ Floyd Norris (October 13, 2011). "Bank Rules That Serve Two Masters". New York Times. Retrieved 2011-10-14. The Volcker Rule, as enacted, 'generally prohibits banking entities from engaging in proprietary trading,' as the regulators stated in their opus this week. But the law goes on to provide exemptions for such things as "trading on behalf of customers,' 'risk-mitigating hedging activity' and 'underwriting and market-making activities.' {{cite news}}: Cite has empty unknown parameter: |coauthors= (help)
  4. ^ a b Clarke & Alper, Dave & Alexandra (October 11, 2011), "U.S. reveals Volcker rule's murky ban on Wall St. bets", Reuters, retrieved 2011-10-11
  5. ^ Touryalai, Halah. Forbes http://www.forbes.com/sites/halahtouryalai/2012/03/21/volcker-rule-refugees/. {{cite news}}: Missing or empty |title= (help)
  6. ^ "About the President's Economic Recovery Advisory Board". Retrieved 2010-09-14.
  7. ^ Paul Volcker (January 30, 2010). "How to Reform Our Financial System". The New York Times. Retrieved 2 November 2011.
  8. ^ Paul Volcker (October 27, 2011). "Financial Reform: Unfinished Business". New York Review of Books. Retrieved 22 November 2011.
  9. ^ a b "White House Recommits to "Volcker Rule" Bank Trade Ban", Reuters, 2010-02-23, retrieved 2010-05-02
  10. ^ Obama takes on Wall Street?, January 22, 2010, The Real News
  11. ^ a b President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers, retrieved 2010-02-27
  12. ^ Hopkins, Cheyenne; Mattingly, Phil (September 26, 2011). "Trader Pay May Face Restrictions Under Volcker Rules Mandated by Dodd-Frank". Bloomberg.com. Retrieved 2011-09-28.
  13. ^ "Former U.S. Treasury Secretaries Endorse Volcker Rule", WSJ, retrieved 2010-02-22
  14. ^ Grim, Ryan (May 18, 2010), "GOP Blocks Three Key Anti-Wall Street Amendments", Huffington Post, retrieved 2010-05-21
  15. ^ Herszenhorn, David M. (May 20, 2010), "Bill Passed in Senate Broadly Expands Oversight of Wall St.", The New York Times, retrieved 2010-05-21
  16. ^ Merkley, Levin: Ban on High Risk Trades Victory for Workers and Businesses, Press release, Carl Levin, US Senate.
  17. ^ Taibbi, Matt (August 4, 2010), "Wall Street's Big Win", Rolling Stone, retrieved 2010-08-04
  18. ^ Onaran, Yalman (June 30, 2010), "Volcker Said to Be Unhappy With New Version of Rule", BusinessWeek, retrieved 2010-07-07
  19. ^ Evis, Peter (July 7, 2010), "Volcker's Treasury Exception", The Wall Street Journal: Heard on the Street, retrieved 2010-07-07
  20. ^ Tara LaCapra, Lauren (September 14, 2010), "BofA Says Volcker Rule Won't Be Too Tough", TheStreet.com, retrieved 2010-07-07
  21. ^ Johnson, Simon (November 4, 2010), "The Volcker Rule After the Midterm Elections", The New York Times, retrieved 2010-11-15
  22. ^ a b Mattingly, Phil (November 19, 2010), "Derivatives, `Volcker' Rules May Be House Republican Targets", Bloomberg.com, retrieved 2010-11-23
  23. ^ Drawbaugh, Kevin (November 4, 2010), "Rep Bachus warns Geithner on "Volcker rule"", Reuters, retrieved 2010-12-01
  24. ^ Orol, Ronald (December 10, 2010), "Volcker: Worried about mega-bank failure rules", MarketWatch, retrieved 2010-12-13
  25. ^ Protess, Ben (October 12, 2011), "S.E.C. Advances Volcker Rule", New York Times, retrieved 2011-10-12
  26. ^ Touryalai, Halai (October 12, 2011), "Volcker Rule Is Out, How Much Will It Hurt?", Forbes.com, retrieved 2011-10-28
  27. ^ Stewart, James (October 21, 2011), "Volcker Rule, Once Simple, Now Boggles", New York Times, retrieved 2011-10-28
  28. ^ a b Torres, Craig (February 29, 2012), "Bernanke Says Dodd-Frank's Volcker Rule Won't Be Ready by July 21 Deadline", bloomberg.com, retrieved 2012-02-29
  29. ^ "What's going on with the Volcker Rule". 7 December 2012. Retrieved 2013-02-27.
  30. ^ "OSEC mandamus suit re: Volcker Rule". 26 February 2013. Retrieved 2013-02-27.
  31. ^ "Volcker Rule Could be Delayed -- Again". Wall Street Journal. 27 February 2013. Retrieved 1 March 2013.
  32. ^ Template:Fr icon M Nicolas Firzli (January 2010), Bank Regulation and Financial Orthodoxy: the Lessons from the Glass-Steagall Act (PDF), retrieved 2010-01-08{{citation}}: CS1 maint: numeric names: authors list (link).
  33. ^ M. Nicolas J. Firzli quoted by Marie Lepesant (June 11, 2012). "Le Modèle des Banques Françaises en Question". Le Parisien Aujourd’hui en France. . Retrieved 12 June 2012.
  34. ^ Brundsen, Jim (January 16, 2012). "Finland's Liikanen to Lead EU Group on Bank 'Structural Reforms'". Bloomberg News. Retrieved 14 July 2012.
  35. ^ Denning, Steve (July 25, 2012). "Rethinking Capitalism: Sandy Weill Says Bring Back Glass-Steagall". Forbes. Retrieved 25 July 2012. Quoting interview on CNBC’s Squawk-Box.
  36. ^ "Volcker Rule to Curb Liquidity, Boost Independent Trader Talent" (PDF). Energy Intelligence Finance. XXXV (25). 20. Retrieved 26 April 2013. {{cite journal}}: Check date values in: |date= and |year= / |date= mismatch (help); Unknown parameter |month= ignored (help)
  37. ^ Kearns, Jeff (15 July 2010). "Deutsche Bank Loses Option Trader Saiers to Hedge Fund Alphabet Management". Bloomberg. Retrieved 26 April 2013.
  38. ^ LaCapra, Lauren Tara (21 Jan 2011). "Volcker Rule Whos Who". The Street. Retrieved 26 April 2013.
  39. ^ Touryalai, Halah (15 Feb 2013). "Top JP Morgan Prop Trader Leaves to Launch Hedge Fund". Forbes. Retrieved 26 April 2013.
  40. ^ Touryalai, Halah (21 March 2012). "Volcker Rule Refugees". Forbes. Retrieved 26 April 2013.
  41. ^ Uchitelle, Louis (January 22, 2010), "Glass-Steagall vs. the Volcker Rule", The New York Times, retrieved 2010-01-27
  42. ^ Chatterjee, R. Rex (May 2, 2012), "Dictionaries Fail: The Volcker Rule's Reliance On Definitions Renders It Ineffective And A New Solution Is Needed To Adequately Regulate Proprietary Trading" (PDF), BYU International Law and Management Review, retrieved 2012-05-02
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