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AmericasSeptember 25 2017

Office of the Comptroller of the Currency wades in on the Volcker Rule

The largely unpopular Volcker Rule in the US, designed to restrict proprietary trading by banks, is up for review, with the Office of the Comptroller of the Currency taking the lead in what could result in regulatory relief for the banking sector. By Justin Pugsley.
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What is happening?

The Office of the Comptroller of the Currency (OCC) is taking the lead in the US administration’s deregulation agenda by launching a review into the Volcker Rule, which restricts banks from engaging in certain aspects of proprietary trading. 

Reg Rage Zen

The OCC has kicked off the review with a consultation, giving banks a golden opportunity to express their dislike of the rule to the regulator and supply lots of data to support their case. The OCC wanted comments by September 21 to help with its deliberations. It is taking its cue from the June report on US financial regulation from the US Department of the Treasury, which singled out the rule as one in need of simplification as it is proving overly burdensome on the US banking system.   

For instance, the OCC is proposing to exempt banks with less than $10bn in assets. It is also asking questions around reporting and compliance obligations, such as are they too burdensome and how can they be reduced? Can technology make compliance easier? Are all the reporting requirements necessary? It is also asking about the implications of the proprietary trading prohibition. The calls for feedback are likely to draw a considerable response from banks.

Why is it happening?

It is part of US president Donald Trump’s deregulation agenda. The idea is to remove unnecessary red tape so US banks lend more freely and stimulate economic growth in the process. The rule is also blamed for harming secondary market liquidity.

The fact the OCC is leading on this is not surprising. Keith Noreika, the acting comptroller of the currency, was one of Mr Trump’s first regulatory agency appointees and is also active in other areas, such as trying to streamline regulatory oversight of bank holding companies.

Nonetheless, it seems unlikely that the rule will be ditched completely – as some Republicans and many bankers would like – due to Democrat opposition in the Senate as well as within regulatory circles. But it could end up being substantially streamlined as some Democrats favour that.

The Volcker Rule is indeed complex and confusing. Smaller banks that do not do trading get caught up in some of its reporting requirements and global banks have to be very careful that their trading activities do not stray into forbidden territory, which can be tricky because defining boundaries is apparently difficult. This has acted as a disincentive in terms of certain types of secondary market activity. 

What do the bankers say?

The bankers are very pleased. They do not like the rule with many seeing it as pointless. Indeed, the American Bankers Association quite bluntly states that it should be abolished, but nonetheless welcomes the review and is fully participating in it. Bankers would also welcome any moves that make the Volcker Rule clearer and simpler to apply, as it would reduce compliance costs and remove uncertainties.

Will it provide the incentives? 

That is hard to say at the moment, given it is unclear how the Volcker Rule will look once it is revised. The problem is that the OCC is only one of five bodies involved in this piece of regulation. They all need to agree among themselves for it to be changed and there have been signs that their views diverge on some points, as Janet Yellen, head of the US Federal Reserve, has publicly pointed out.

It therefore seems unlikely that a final proposal will emerge by the end of 2017 as some agency heads firmly believe in the rule. There are also likely to be other consultations going forward. Also, going via the agencies is where most of the work on Volcker is likely to be done due to political deadlock in the Senate. As Mr Trump gradually replaces the various agency heads with his nominees that should make progress on reform easier.

If the result is a more targeted (removing smaller banks from it, for instance) and a simpler to apply and clearer Volcker Rule, then it would certainly reduce the compliance burden for banks. A simplified version could still achieve the same financial stability aims as originally intended.

One of the reasons for its complexity is that it was rushed through (like Dodd-Frank itself, of which it is part), and therefore contradictions and unnecessary requirements crept in. Removing them without watering down financial stability aims can only be a good thing. If this happens, banks would feel more confident about engaging in activities within a clearer framework, which would make life easier for them and for the regulators, and would probably be good for secondary markets and the economy overall.

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