Fed Gives Banks Until July 2014 to Comply With Volcker Rule

Former Chairman of the Federal Reserve Paul Volcker
Paul Volcker, director of financial analysis at the International Tax & Investment Center and former chairman of the U.S. Federal Reserve. Photographer: Peter Foley/Bloomberg

Wall Street banks will have two years to implement the so-called Volcker rule so long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said.

Banks will get the “full two-year period” provided by the Dodd-Frank financial overhaul law to “conform” their activities and investments, the Federal Reserve and four other U.S. agencies said in a statement today. The Fed has the authority to extend the period of compliance beyond July 21, 2014, the regulators said.

“A lot of sweating brows at big banks are a lot drier today,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm whose clients have included Wells Fargo & Co. “The statement finally makes clear that they can’t be held accountable for compliance with a rule not yet released.”

The rule, named for its original champion, former Fed Chairman Paul Volcker, is one of the most contentious parts of the Dodd-Frank law that was drafted to help prevent another financial crisis. It’s intended to reduce the chances that banks will put depositors’ money at risk. Banks argue that it is so broad and poorly defined it will force them to leave business lines and could actually increase risks for their clients.

Former Fed Chairman

Regulators had signaled that they probably would provide banks more clarity because they wouldn’t finish the rule before the July 21, 2012 implementation deadline.

Fed Chairman Ben S. Bernanke said Feb. 29 that he didn’t think the deadline would be met, and Fed Governor Daniel Tarullo, during a Senate hearing last month, indicated that guidance on the law’s enforcement and scope of the conformance period would be forthcoming.

“During the conformance period, banking entities should engage in good-faith planning efforts, appropriate for their activities and investments, to enable them to conform,” the regulators said in today’s statement.

Today’s statement isn’t “an all-clear” because regulators also said the banks need to make plans to comply, Petrou said.

The regulators’ decision “is a good step, but not good enough to address the concerns of the legal and compliance departments,” Scott Talbott, chief lobbyist for the Financial Services Roundtable, said in an e-mail. The regulations implementing the rule are “filled with hundreds of unanswered questions that make compliance complicated, if not impossible.”

Rule’s Complexity

Lawmakers and regulators have considered taking action on the timeline for the Volcker rule at the request of the banking industry, which raised concerns about how to comply with the statute. It takes effect on July 21 with or without a final rule.

The Fed, Securities and Exchange Commission and Federal Deposit Insurance Corp. are among the regulators drafting the final rule. The initial 298-page proposal was released in October and criticized by groups on both sides of the issue.

Senators Jeff Merkley of Oregon and Carl Levin of Michigan, the Democrats who drafted the provision in Dodd-Frank, asked for a more restrictive interpretation.

“Today’s guidance marks another important step towards protecting taxpayers and our economy from the high-risk, conflict-ridden proprietary trading that nearly brought down our financial system,” Merkley and Levin said in a statement today.

Executives from financial firms, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., asked regulators to broaden exemptions to the rule. Regulators have received more than 17,000 comment letters on the proposal.

‘Way Too Complicated’

The rule has become “on anybody’s estimation, way too complicated to be successfully implemented yet, so it has to be simplified,” Morgan Stanley Chief Executive Officer James Gorman said in an interview on Bloomberg Television today before the statement was released. “This is a question of defining what is a proprietary position, what is not.”

The KBW Bank Index of 24 U.S. financial institutions fell 0.8 percent to 47.83 at 4 p.m. in New York, while the Standard & Poor’s 500 Index declined 0.6 percent to 1,376.92.

The clarification still falls short of what trade groups representing the largest banks have been advocating.

The regulators’ decision is “critically important because it alleviates concerns over potentially having to comply with a rule whose details had not yet been made clear,” Kenneth Bentsen, executive vice president for public policy at the Securities Industry and Financial Markets Association, said in a statement.

‘Inconsistent’ With Intent

“SIFMA continues to believe that the rule as proposed is structurally flawed, particularly as it relates to the assumption that any activity is prohibited proprietary trading unless otherwise explicitly prescribed,” he said. “We believe this is inconsistent with congressional intent.”

SIFMA, the Clearing House Association, the American Bankers Association and the Financial Services Roundtable -- Washington-based groups that represent firms including Morgan Stanley, Bank of America Corp., Citigroup Inc. and Goldman Sachs, signed a letter last week asking regulators to scrap the proposal altogether and start over.

“The stakes for our already stressed financial markets are high,” the trade groups said in an April 16 letter to the Commodity Futures Trading Commission. “To minimize sudden detrimental impacts to existing businesses, and negative impacts to the U.S. economy and, indeed, to retail investors and consumers, the recrafting of the rule must be performed in a nuanced and iterative way.”

Bipartisan Group

A bipartisan group of six senators introduced legislation March 22 that would postpone implementation of the rule and align it with regulators’ completion of detailed rules for the trading ban.

The regulators’ statement “provides much-needed clarity,” two of those senators, Virginia Democrat Mark Warner and Idaho Republican Mike Crapo, said in a statement today. “Now the agencies should take the time to understand the feedback they have received and provide a clear rule.”

Representative Barney Frank, the Massachusetts Democrat who co-authored Dodd-Frank, has urged banking agencies to complete a simplified version by Sept. 3.

The decision is “an appropriate and reasoned approach,” Frank, the top Democrat on the House Financial Services Committee, said in a statement today. While relieving pressure on regulators to finish their work by July 21, it’s important for the Fed “to propose a final rule quickly, and I am confident that they are seeking to do so.”

The current proposal would allow banks to conduct proprietary trading that is tied to market-making activities or hedging risk. Those exemptions have been criticized for adding to the complexity that would make implementing the ban difficult.

In remarks in New York on March 21, Volcker said that “strong resistance to the principles involved by affected institutions, each with deep pockets and phalanxes of lobbyists, shouldn’t be surprising.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE