The Volcker Rule – Seeking Out Systemic Risk

(In this video Federal Deposit Insurance Corp. Chairman, Sheila Bair, discusses the Dodd-Frank Act, which was signed into law by President Barack Obama in July, and the Volcker rule.)

If you have been reading the news in the past few days, I’m sure you came across the latest announcements around “The Volcker Rule”. This rule, which a year ago President Obama announced was being put in place to end the mentality of “Too Big to Fail,” prohibits banks from engaging in activity that would create a material conflict of interest between a bank and its clients, customers and counterparties. (For more information about what that Volcker Rule entails, see our earlier post). It also is set to prevent any direct or indirect material exposure by a bank to high-risk assets or high-risk trading strategies.

So this past Tuesday the Financial Stability Oversight Council released documents that were meant to give a sense of what the final rule and the implementation process would look like (though it seems that still, none of these points were clearly covered.) Also, it has opened a new can of worms by touching upon the fact that this rule would also extend to nonbanks that were systemically risky, and the kicker is that it didn’t provide any guidelines to who these nonbanks might be!

Bottom line – this announcement peaked everyone’s interest again without giving too much detail away, but what I think the industry can glean from this is that the regulators are still after nonbanks, too. Now hedge funds and insurers and other nonbanks are on their toes, without even really being pinpointed just yet. But we all do have to keep in mind that the documents released this week are just a framework and no real rules have been placed yet. While it might be nice for someone to announce when those rules will be officially released, it looks like 2011 will be another year of major reform and changes for the industry. It will be interesting to see what unfolds in the coming months and who exactly will be affected.

(Video from Tuesday discussing how regulators were meeting today to examine how to enforce the Volcker rule, with John Taft, SIFMA chairman.)

This entry was posted in Dodd-Frank, Regulation and tagged , . Bookmark the permalink.

One Response to The Volcker Rule – Seeking Out Systemic Risk

  1. Pingback: What is a Hedge Fund Hotel? | The Bull Run

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