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Volcker Rule May Cut $10 Billion in Bank Profit, S&P Says

Volcker Rule May Cut $10 Billion From Bank Profit, S&P Says
U.S. President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act in Washington, D.C. Photographer: Win McNamee/Pool via Bloomberg

The Volcker rule could cut profit at the biggest U.S. banks twice as much as earlier estimates if regulators take a strict stance on limiting proprietary trading, Standard & Poor’s said.

“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue.

Goldman Sachs Group Inc. and Morgan Stanley, which were the two biggest U.S. securities firms before converting to banks in 2008, stand to lose the most because they get a larger percentage of their revenue from trading than the other lenders, S&P said in the report. Regulators are unlikely to draft a final version of the rule until the end of 2012, S&P said.

“Less strict rules would have a limited impact on banks’ earnings and business positions, so it’s unlikely that we would take any rating actions as a result,” S&P said in the statement. “Stricter rules could lead us to take negative rating actions on certain banks.”

In addition to Goldman Sachs and Morgan Stanley, S&P included Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc., U.S. Bancorp, and Wells Fargo & Co. in its analysis. Those eight banks earned a combined $70.5 billion in pretax profit in the first nine months of this year, according to company reports.


Section 619 of the Dodd-Frank Act, also known as the Volcker rule, limits federally regulated banks’ ability to make proprietary trades, or bets on their own behalf, and curbs their investments in private equity and hedge funds to 3 percent of Tier 1 capital. While proponents of the rule say it will help minimize risk-taking, executives at some of the banks say the rule is unnecessary.

S&P said proprietary-trading restrictions could help make banks safer.

“The implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk,” S&P said. “This risk mitigation could lessen revenue and earnings volatility, which we would view favorably.”

While the Volcker rule will also affect the U.S. operations of non-U.S. companies such as Deutsche Bank AG and Zurich-based UBS AG, S&P said those lenders’ profits weren’t included in the analysis.

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