volcker rule


  • Federal Reserve Governor Lael Brainard voted against the proposal, arguing that “several of the proposed changes will weaken core protections in the Volcker rule and enable
    banking firms again to engage in high-risk activities related to covered funds”[11] On June 25, 2020, the Volcker Regulators relaxed part of the rules involving banks investing in venture capital and for derivative trading.

  • [30] Republican representatives to Congress also expressed concern about the Volcker Rule,[31] saying the rule’s prohibitions may hamper the competitiveness of American banks
    in the global marketplace, and that they may seek to cut funding to the federal agencies responsible for its enforcement.

  • [27] Following the passage of the Financial Reform Bill, many banks and financial firms indicated that they did not expect the Volcker Rule to have a significant effect on
    their profits.

  • [10] On January 30, 2020, the Federal Reserve put forward a proposal to roll back some provisions of the rule, specifically rules that limit bank investment in venture capital
    and securitized loans.

  • The extension to 2016 is the second of three possible one-year extensions the Federal Reserve may issue under the Dodd–Frank Act (regulators provided an initial one-year extension
    when the Volcker Rule was finalized in December 2013).

  • [55] On October 24, 2017, citing “no foreseeable agreement” in sight on criteria, the European Commission scrapped the draft legislation that would have permitted the EBA
    regulator to order “too big to fail” banks to split off their trading activities.

  • [41] Subsequently, it was reported that the Volcker Rule was not likely to be in effect until July 2014 and that some industry lobbyists were pushing for extension beyond
    that date.

  • [44] However, after a lawsuit was filed to stay the effect of the Volcker Rule regulations over whether banks could be required to sell or divest collateralized debt obligations
    (CDOs) backed by trust-preferred securities (TruPS), on December 27, 2013, the Federal Reserve Board, FDIC, OCC, CFTC and SEC all announced they were reviewing whether it would be appropriate to exempt a small subset of securities from the
    rule, on which they would rule by January 15, 2014, at the latest.

  • The rule was originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds
    of speculative investments that do not benefit their customers.

  • Federal Reserve Chairman Jerome Powell called the proposed change “a simpler, clearer approach to implementing the rule [which] makes it easier for both banks and regulators
    to carry out the intent of the rule”.

  • [19] As of February 23, 2010, the U.S. Congress began to consider a weaker bill allowing federal regulators to restrict proprietary trading and hedge fund ownership by banks,
    but not prohibiting these activities altogether.

  • [51] Ongoing regulatory debate in the US and the European Union[edit] European scholars and lawmakers also discussed the necessity of banking reform in light of the crisis,
    recommending the adoption of specific regulations limiting proprietary trading by banks and their affiliates, notably in France where SFAF and World Pensions Council banking experts argued that, beyond fragmented national legislations, such
    rules should be adopted and implemented within the broader context of statutory laws valid across the European Union.

  • [61][62] Critics of the rule pointed to the subsequent brain drain of top talent, however the trading expertise thus lost would only relate to the activity to be curtailed
    by the new framework, and would only be lost to the banks rather than the economy as a whole, and may be understood as precisely the sort of cultural change within taxpayer-supported banks that the rule was intended to achieve.

  • The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts, although a number of exceptions
    to this ban were included in the Dodd–Frank law.

  • [10] On December 18, 2014, the Federal Reserve extended the Volcker Rule’s conformance period for “legacy covered funds” (a defined term) until July 21, 2016, and indicated
    it would likely extend the period further to July 21, 2017.

  • One implication of this rule change would be greater bank activity in the market for collateralized loan obligations (CLOs), where banks were previously barred from involving
    themselves with CLO funds that included a debt component.

  • [39] Under the Dodd–Frank financial reform law, the regulations went into effect on July 21, 2012.

  • [42] On December 10, 2013, the Volcker Rule regulations were approved by all five of the necessary financial regulatory agencies.

  • [28] Implementation Public comments to the Financial Stability Oversight Council on how exactly the rule should be implemented were submitted through November 5, 2010.

  • [45] On January 14, 2014, interim final regulations were adopted to permit certain banking entities to retain those investments.

  • “[38] Regulators gave the public until February 13, 2012, to comment on the proposed draft of the regulations (over 17,000 comments were made).

  • [32] Regulators presented a proposed form of the Volcker Rule regulations for public comment on October 11, 2011, which was approved by the SEC, The Federal Reserve, The Office
    of the Comptroller of the Currency and the FDIC.

  • [30] The Chairman of the House Financial Services Committee, Representative Spencer Bachus (R-Alabama), stated that he was seeking to limit the effect of the Volcker Rule,
    although Volcker himself stated that he expected backers of the rule to prevail over such critics.

  • [7] On January 14, 2014, after a lawsuit by community banks over provisions concerning specialized securities, revised final regulations were adopted.

  • However, during his report to Congress on February 29, 2012, Federal Reserve Chairman Ben S. Bernanke said the central bank and other regulators would not meet that deadline.

  • [17] Also under discussion was the possibility of placing restrictions on the way market-making activities are compensated; traders would be paid on the basis of the spread
    of transactions rather than any profit that the trader made for the client.

  • I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance.

  • On December 10, 2013, the necessary agencies approved regulations implementing the rule, which were scheduled to go into effect April 1, 2014.

  • [54] On July 25, 2012, former Citigroup Chairman and CEO Sandy Weill, considered one of the driving forces behind the considerable financial deregulation and “mega-mergers”
    of the 1990s, surprised financial analysts in Europe and North America by “calling for splitting up the commercial banks from the investment banks.

  • [22] Conferees changed the proprietary trading ban to allow banks to invest in hedge funds and private equity funds at the request of Senator Scott Brown (R-Mass.

  • Under the existing rule, banks could make indirect investments into venture capital funds but faced restrictions on directly owning a fund.

  • [43] Furthermore, the final rule put the onus on banks to demonstrate that they are operating their trading activities in compliance with the rule and required CEO certification
    of the effectiveness of the compliance program.

  • [9] On August 11, 2016, several large banks requested a 5-year delay to exit illiquid investments.


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Photo credit: https://www.flickr.com/photos/aidanmorgan/6473543547/’]