The Federal Reserve has proposed augmenting the Volcker rule so that it focuses more on the biggest banks while streamlining the process for all banks affected.
The Federal Reserve announced proposed changes to the rule while also calling for a sixty-day comment period.
Federal Reserve Governor Lael Brainerd issued a statement which read in part.
“First, the proposal would tailor the Volcker compliance regime to focus on the firms with trading operations of greater than $1 billion in assets that account for an estimated 98 percent of total U.S. trading activity by banking entities. The application of the Volcker rule to firms with little trading activity results in compliance costs without a commensurate benefit to financial stability. For this reason, I support the proposed rebuttable presumption of compliance for firms with less than $1 billion in consolidated gross trading assets and liabilities.
“Second, the compliance mechanism developed by the agencies to distinguish between proprietary trading, on the one hand, and underwriting and market making, on the other hand, has been difficult to implement and supervise in practice. Rather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review. The requirement of CEO attestation is critical for this to work, in my view.”
Fed Chair Jerome Powell also noted: “We have had almost five years of experience in applying the Volcker rule. The agencies responsible for implementing the rule see many opportunities to simplify and improve it in ways that will allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.
“The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance. Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements.”
The Volcker rule, named after former Federal Reserve Chairman Paul Volcker, was passed as part of the Dodd/Frank bill.
It forbids banks from engaging in “proprietary trading” or trading in their own accounts.
Critics have argued that in practice proving that legitimate investing and market making activity by banks is not proprietary trading has become burdensome.
The Federal Reserve noted this criticism in a statement: “The Federal Reserve Board on Wednesday asked for comment on a proposed rule to simplify and tailor compliance requirements relating to the ‘Volcker rule.’ By statute, the Volcker rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.
“Since regulations implementing the Volcker rule were finalized in December 2013 by five federal agencies, experience has shown that the complexity of the rule has created compliance uncertainty for firms subject to the rule. The proposed changes are intended to streamline the rule by eliminating or modifying requirements that are not necessary to effectively implement the statute, without diminishing the safety and soundness of banking entities.”