Three years after the passage of the landmark Dodd-Frank financial reform law, regulators are rushing to finish writing the rules for one of its key provisions: the Volcker Rule.
Named for revered former Federal Reserve Chairman Paul Volcker, who tamed inflation in the 1980s and pushed for the Dodd-Frank reforms, the rule would restrict investment banks from engaging in speculative trading on their own behalf and bar them from owning hedge funds. Its boosters see it as a crucial measure for preventing bankers from recklessly gambling with depositors’ money.
Regulators at the Fed and four other agencies have said they will vote on the final rule Tuesday or soon thereafter.
They have stalled writing the rule for two years as lobbyists have tried to shape it to financial firms’ advantage. Advocates say they are happy just to see it reach completion. After missing the initial deadline for implementing the rule in 2012, it wasn’t clear when, if ever, it would go into effect.
After years of lobbying and disagreements among regulators, advocates hope that the resulting rule might be stronger in its prohibitions against banks making speculative bets than the draft rule proposed in 2012.
Bart Naylor, a financial policy advocate for Public Citizen, told the Washington Examiner that the “trajectory” of the rule-making has been encouraging. “It’s possible that the tide has turned and that regulators have finally grown spines,” he said.
In particular, Naylor said, it’s likely that the final rule will draw a clearer line between legitimate hedging activities to reduce risks and what is known as proprietary trading — trading engaged in purely for profit.
That distinction was at issue in the 2012 “London Whale” trades in which JPMorgan’s London investment office lost more than $6 billion in bets on derivatives, which it said were part of a hedging strategy. The London Whale episode, which resulted in JPMorgan paying more than $1 billion to U.S. and British regulators, in turn increased the pressure for regulators to finish a strong Volcker Rule.
The final rule is expected to include clearer guards against banks engaging in disguised moneymaking schemes. While banning proprietary trading, it would let banks continue market-making for clients, underwriting and risk-mitigating hedging — all considered legitimate activities for banks that take deposits and are insured by the federal government. It also would allow banks to invest in government debt.
In other regards, though, such as regulating the compensation of bank managers overseeing hedging activities, it is expected that the final rule may be less restrictive of bank business.
If all five agencies — the Fed, the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Commodity Futures Trade Commission, and the Federal Deposit Insurance Corporation — approve the rule, it’s on to the next hurdle: the inevitable lawsuits from banks.