While flipping through the Wall Street Journal last Monday, I did my usual scan of the Money & Investing section. Being that our 5th Annual OTC Derivatives Operations & Processing conference was days away, I settled on a front page article about the infamous Messrs Dodd and Frank. As I started to read the article Regulators, Banks Grapple With Volcker Rule’s Reach, however, a regulatory term I shamefully admit I hadn’t noticed before stood out, Volcker Rule. Intrigued, I read further. While I got the gist of the rule from the article which turns out to be a measure contained in the Dodd-Frank Bill, I decided I needed to know more. As a bit of background, and for those of you that were in the same Volcker boat as me, it is a proposal written by Obama’s chair of the Presidents’ Economic Recovery Board and former Fed Chairman, Paul Volcker, and endorsed by Obama on January 21, 2010. In short, this rule proposes to place limitations on banks’ proprietary trading activities and allow them to trade on behalf of their clients but restrict their own investments in hedge funds and private equity firms. Seems straight forward, but it leaves me with a few questions/concerns:
1. Some of the regulators working on this rule have worked in finance, so will the final rule put into law (if it gets that far) be unbiased?
2. While this rule is being put in place to address the “Too Big to Fail” mentality, is this too extreme? Will Volcker stall economic recovery? While it does reduce banks liabilities, limiting speculative trading entirely would negatively affect a bank’s capital assets and require them to make profits on regular banking activities which would in turn trickle down to Main Street.
3. Companies that did not engage in risky trades such as USAA would be affected thus forcing change to investment practices that have withstood the test of time. Therefore, the Feds might decide who falls under the law on a case-by-case basis which seems complicated, messy and could result in never-ending disagreements.
4. Market competition would increase as proprietary traders leave banks to start their own hedge funds which could spawn a new stream of risky business practices in order to out perform the next guy (or gal).
While this proposal was backed by renowned economists and members of Congress, the Volcker Rule has not passed into law – yet. Over the past year, banks continue to meet and voice their concerns with Fed officials in the hopes of softening some of the requirements, but it doesn’t seem certain to me that this proposal will ever become a law. What are your thoughts on the Volker Rule? Do you think it will hurt or help Wall Street?