This week the FDIC, Federal Reserve, SEC, OCC & CFTC passed the Volcker Rule. The rule is named for Paul Volcker, Chairman of the Federal Reserve under President Jimmy Carter. Volcker proposed the idea in 2009 to limit risk taking in systematically important financial institutions and limit the amount of deposits they can take in. The plan was outlined in a report from a panel of former central bankers, finance ministers and academics known as the “Group of Thirty.” At the time Volcker called banking “a mess” and said the financial system had “failed the test of the marketplace.”
Obama introduced the rule in January 2010 publicly with Volcker by his side. The law seeks to prevent banks from taking market positions that can cause their collapse. It will take effect over objections from lobbyists seeking to protect the $44 Billion that the U.S. banks make from trading securities. Lawmakers argued that risky trades made by the banks can endanger taxpayers. The measure was devised to prevent banks with government backstops, such as FDIC insurance, from placing risky bets.
Banks will be required to prove they are not placing risky trades and that trades serve client needs or hedge against market risk. The deadline for banks to conform to the new regulation is July 21, 2015. The CEO’s of large banks will be required to annually attest, in writing, compliance with new oversight. Institutions with at least $50 Billion in trading assets and liabilities will be required to report seven quantitative measurements, including the amount of risk their trading desks are taking at a selected point in time.
Lobbyists in the banking industry have been fighting the impending regulation for five years now. “Many bankers will struggle to understand complex provisions that have no application to their business model and are open to conflicting interpretations,” Frank Keating, president of the American Bankers Association in a statement.
Banks such as JP Morgan and Goldman Sachs already closed or spun off their trading desks, as well as their private-equity arms and hedge funds. Banks are concerned the rule will diminish their profits as well as the total amount of capital in the stock market. The law separates investment banking, private equity, and proprietary trading (hedge funds) from their consumer lending operations.
“Our financial system will be safer and the American people are more secure because we fought to include this protection in the law,” President Obama said in a statement. The implementation of the law is considered a huge win for the current administration, which sought to change the way Wall Street operates and severely limit the relationship between commercial and investment banks.