Fed Proposal Would Ease Volcker Rule Restrictions

The Federal Reserve just took a huge step forward in rolling back some restrictions of the Volcker Rule.  As part of the Dodd-Frank legislation in 2010, the Volcker Rule was a response to the financial collapse of 2008 and designed to keep banks from speculating in markets.  It did not go into effect until 2015 and was met with negative press well before its enactment.  The Brookings Institution wrote a piece entitled “The Volcker Rule is Still a Bad Idea” a full three years before it became law

In today’s meeting, the “Fed governors voted 3-0 to seek comment” about this proposal which would ease the restrictions on some of the largest banks in the country and remove most restrictions from the nation’s smallest banks.  

As reported by Reuters, this proposal would create a tiered model to determine how strict the rules would be for each institution:

The proposal would also create a tailored regime according to the size of an institution, with the most active trading firms with more than $10 billion in trading assets facing the most rigorous set of rules.  Banks with trading assets between $10 billion and $1 billion would enjoy a simpler compliance framework, while banks with less than $1 billion in trading assets would be presumed compliant with the rule.  The proposal would also scrap a subjective standard which assumes banks’ short-term trading is profit-seeking unless they can prove otherwise, replacing this short-term trading measure with an accounting test.

We went on the FDIC’s website to download the list of banks in order of trade assets (FDIC numbers are reported in thousands) and emailed the FDIC to get more information.  A media representative told us, “The limit is $10 billion in trading assets and liabilities for banks covered under the Volcker rule.  About 18 banks do 95 percent of the activity, and roughly half of the banks are foreign-owned.”  That would make sense with regard to the data we downloaded.

The top 6 banks listed (JP Morgan, Citibank, Bank of America, Wells Fargo, Goldman Sachs and HSBC respectively) all reported well over the $10 billion limit at year-end 2017.  Then there’s a sharp drop-off to nearly $4.5 billion for State Street Bank and Trust, followed by SunTrust, The Bank of New York Mellon, PNC Bank, U.S. Bank, Morgan Stanley, First Tennessee Bank, Fifth Third Bank and BOKF, respectively.  Those banks round out the threshold of $1 billion to $10 billion in trade assets.  

Kansas City-based UMB Bank, Country Club Bank and Commerce Bank all fall within the less than $1 billion asset category meaning they would face the most lenient restrictions should the proposal pass. 

In a statement, the Fed’s vice chairman for supervision, Randal K. Quarles, said, “I view this proposal as an important milestone in comprehensive Volcker rule reform, but not the completion of our work.”