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Invoking the Volcker Rule

By: Bill Poquette

In the few weeks preceding and following the Feb. 13 deadline for comments on regulators’ proposal for implementing the Volcker Rule, controversy swirled over congressional intent and potential unintended consequences. The rule, embedded in the Dodd-Frank Act, is set to go into effect July 12, but Federal Reserve Board Chairman Ben Bernanke conceded in congressional testimony in late February that chances of meeting that deadline are slim. Not the least of the factors contributing to the delay are a reported 17,500 comment letters received by the supervisory agencies.

The task seemed straightforward enough: The Volcker Rule was supposed to limit the ability of certain banks and their affiliates from engaging in proprietary trading or investing in hedge funds and private equity funds. But in a member guide to Dodd-Frank published by the American Bankers Association, the dilemma is framed this way: “The rule proposed … attempts to curb excessively risky bank trading and investment activities. Instead the rule broadly prohibits a host of legitimate principal trading and investment activity.”

In mid-January, with the comment period still open, regulators recognized the complexity of the issues involved as they testified before the Subcommittees on Capital Markets and Government Sponsored Enterprises and Financial Institutions and Consumer Credit. But they also tried to assure critics that the final rule will incorporate exemptions designed to preclude the scenario envisioned by the ABA.

On the issue of proprietary trading, the Federal Reserve’s Gov. Daniel K. Tarullo offered this explanation: “The statute applies only to positions taken by a banking entity as principal for the purpose of making short-term profits; it does not apply to positions taken for long-term or investment purposes. Moreover, the statute contains a number of exemptions, including for underwriting, market-making-related activities, and risk-mitigating hedging activities. The implementing rule proposed by the agencies incorporates all of these statutory definitions and exemptions.”

And according to Acting Comptroller of the Currency John Walsh, the agencies’ proposal implements the prohibitions, restrictions, permitted activity exceptions, backstops and rules of construction of Section 619 of the Dodd-Frank Act. “The proposed rule,” he said, “also establishes requirements for statutorily permitted activities and interprets many of the permissible activity provisions conservatively, including, in particular, the provisions for underwriting, market-making-related activities and risk-mitigating hedging.”

Unfortunately, the recent dialogue over the Volcker proposal has served more to obfuscate than illuminate. With the July 12 deadline rapidly approaching, the question has come up whether the Volcker Rule as mandated in Dodd-Frank will take effect July 12, with or without the regulators’ final version. In a letter to the regulators and the House and Senate banking committees, the American Securitization Forum has asked for legislation to move the July 12, 2012, deadline to at least 12 months after the final rule is in place.

Buying time to resolve the deadline issue with an extension mandated by Congress seems reasonable. But the parties should keep in mind the original goal of the Dodd-Frank round of financial reform, which is to avert the need for future bailouts. That includes a strong Volcker Rule to curb excessive risk-taking with insured deposits by a few too-big-to-fail banks.

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) April 2012 by BankNews Media