The Volcker Rule Is Tough. It’s Complicated. Will It Be Effective?

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from Bloomberg Businessweek,

In 2009 former Federal Reserve Chairman Paul Volcker had a simple idea to prohibit deposit-taking banks from trading for their own accounts. Proprietary trading—wherein banks make bets in pursuit of profit, putting depositors and taxpayers at risk—shouldn’t be that hard to define, he told the Independent, a British newspaper, last year. “It’s like pornography,” he said. “You know it when you see it.”

1,238 days


71 page rule

893 page preamble

200 attorneys

5 agencies

Defining the sin of proprietary trading wasn’t as easy as the wise man believed. Regulators’ first crack at a Volcker Rule drew more than 18,000 comments. Wrangling went on for a year and half past the summer 2012 scheduled date for completion. Five agencies finally adopted the rule on Dec. 10. Including a preamble, it comes to 964 pages. The only people who seem truly happy with the final product are lawyers: Jones Day alone had 200 attorneys around the world reviewing the rule the week it came out. Compliance is expected to take 2.3 million hours of paperwork annually, according to government estimates.

No teeth – metrics matter

Is the Volcker Rule worth all the trouble? Scheduled to take effect in July 2015, it will make banks safer by prohibiting some risky trading practices.

At the same time, the rule will complicate banks’ ability to perform some of their routine functions, such as buying and selling stocks and bonds on clients’ behalf. More important, it does nothing about the biggest risks facing the banking system. “It sucked up the oxygen and energy that could have gone into much bigger problems,” says Anil Kashyap, a professor of economics and finance at the University of Chicago Booth School of Business.

Under the Volcker Rule, banks that help companies issue stocks and bonds can still hold some of those securities temporarily as part of the underwriting process. Banks are also allowed to make markets—that is, stand ready to buy when their clients are selling, and sell when they’re buying.

Vague rules – challenges compliance divisions

No one can say for sure how the rule will work, because even in 964 pages it doesn’t spell out unambiguously what’s allowed. Since five agencies are in charge of compliance, multiple regulators could target the same activity in a single firm in different ways, says Julie Williams, who was chief counsel for the Office of the Comptroller of the Currency before joining consulting firm Promontory Financial Group. Banks may shy away from permissible activities just to avoid getting too close to the blurry line, says Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics, a consulting firm that has big banks as clients. “It would be better to have a few bright lines” separating permitted from prohibited activities, she says.

Unfinished work.

Some still argue that Congress should go back to a version of the Depression-era Glass-Steagall Act, which barred deposit-taking banks from investment banking activities. “It is premature for anyone to take a victory lap when ‘too-big-to-fail’ policies are still alive and well,” Brown said in a statement last week. “Despite what some on Wall Street and in Washington may say, our work is not finished.”

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