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Volcker Rule Will Cost Banks Up to $4.3 Billion, OCC Says

Paul Volcker
The Volcker Rule, named for former Fed Chairman Paul Volcker, bans banks from trading with their own money and limits their stakes in certain private funds. Photographer: Andrew Harrer/Bloomberg

The Volcker Rule will cost U.S. national banks as much as $4.3 billion to implement as it forces them to sell restricted investments at a loss, according to a study by the Office of the Comptroller of the Currency.

The regulator estimates implementation costs between $413 million and $4.3 billion for banks it supervises, the OCC said in a report released yesterday. Most of the potential costs could come from the rule’s curbs on certain investments, such as in some collateralized loan obligations. The agency also said affected banks will mostly be those with more than $10 billion in assets and could include as many as seven community banks.

The Volcker Rule, which bans banks from making speculative trades with their own money and limits their stakes in certain private funds, was adopted Dec. 10 by five U.S. financial regulators. The rule, named for former Fed Chairman Paul Volcker, imposed the restrictions in response to the 2008 credit crisis.

“The range of our cost estimate primarily reflects the uncertainty of the final rule’s impact on the market value of banks’ investments,” according to the OCC’s report. After Volcker, the market value “could drop by up to 5.5 percent.”

Selling the restricted assets after such a decline could cost the banks as much as $3.6 billion, according to the report. The remainder of the costs would largely come from as much as $541 million in compliance and reporting burdens, the agency said.

Larger Banks

Yesterday’s analysis focuses just on OCC-supervised firms - - mostly on 46 larger banks -- and not on costs from implementation by other agencies, including the Federal Reserve and Securities and Exchange Commission.

SEC Commissioner Michael Piwowar, a Republican, said the OCC’s analysis was “not rigorous” and omitted factors that may increase banks’ costs. Among the costs ignored in the OCC analysis, he said, were those incurred by banks as they eliminated operations conducting proprietary trades in anticipation of the rule’s enactment.

Piwowar also said the report didn’t make clear that the 46 banks will face continuing compliance costs, amounting to about $2 billion over four years.

“Based upon the fact this is not a serious analysis, I have no way to evaluate whether they are even in the right ballpark,” Piwowar said in an interview today.

Rule Changes

Regulators have already responded to some Volcker Rule complaints by the banking industry. On Jan. 14, the agencies moved to shield some collateralized debt obligations backed by trust-preferred securities after community banks said they would be harmed.

Zions Bancorporation, the only one among 30 of the largest banks that didn’t have enough capital to withstand Fed stress tests announced yesterday, had said in December the Volcker Rule would force it to sell assets at prices so low its annual profit could be wiped out. The Salt Lake City-based bank has already notified the Fed the losses will be less than initially estimated.

Regulators responsible for implementing Volcker have formed an interagency group to coordinate handling the multiagency rule -- one of the most contentious measures arising from the 2010 Dodd-Frank Act.

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