The Volcker Rule: Where we stand and where we could go

The Volcker Rule: Where we stand and where we could go

John Martin
Associate Editor
Loyola University Chicago School of Law J.D. 2018


On January 24, 2018, a coalition of 43 states’ community banking associations sent a letter to majority leader Senator Mitch McConnell and minority leader Senator Charles Schumer asking for bipartisan collaboration to pass Senate Bill 215, the “Economic Growth, Regulatory Relief and Consumer Protect Act” in an expedient manner.  The group, part of the larger Independent Community Banks of America, represent over 5,700 banks throughout the country.

Previously, the bipartisan Senate Banking Committee passed the bill with a 16-7 vote.  Now that it is out of committee, the bill goes to the floor of the Senate, where the coalition letter entreats both the majority and the minority leader to pass the bill without amendments, which might “upset the bipartisan balance of the bill”.  Examining one of the key components of the bill, we are seeing the beginning of what might be a prolonged fight against the Volcker Rule.

The Volcker Rule…

The Volcker Rule, named after economic and former Federal Reserve Chairman Paul Volcker, prohibits banks from engaging in proprietary trading or owning or possessing certain relationships with hedge funds.  Put into place as part of the Dodd-Frank Act, the concept behind the rule is to prevent a bank from becoming “too big to fail”, one of the common sayings from the 2008 Financial Crisis.

However, the rule’s necessity has been called into question since it was first passed and some years later, implemented.  Jamie Dimon, CEO of J.P. Morgan Chase, has stated he doesn’t disagree with the intent of the rule, but rather the structure of how the rule, as it is currently worded, works, saying that, “if you want to be trading, you have to have a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something.”

As part of compliance with the rule, the bank must report to five different agencies regarding their activities, namely, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission (SEC), the FDIC, and the CFTC.  This is a staggering number of agencies to report trades to, particularly since obtaining approval can take time and the market is moving in the interim.  In a 2014 article in the New York Times, Timothy Geithner, Treasury Secretary under President Barack Obama during the debate and passage of the bill, stated he never believed that proprietary trading led to the financial crisis and that the banks that failed “weren’t the types of banks the legislation was designed to regulate”.  More generally, he opposed the Rule, the reasons why he eventually supported it were political, not financial.

…and where it might end up

In the middle of May 2017, Steven Mnuchin, current Treasury Secretary under the Trump Administration, gave instructions to the five agencies to work on particulars of the Volcker rule surrounding the rule’s efficacy.  The agencies have yet to finalize what they want to streamline, something understandable due to the breadth of the rule and the fact that it took years to come up with the guidelines to begin with.

There are those who support the rule as it currently stands, including former Representative Barry Frank, whose name is attached to the legislation that created the Volcker Rule, the Dodd-Frank law.

Whether the Senate bill ends up being voted according to party lines remains to be seen. Yet Section 203 of the bill would amend the Volcker rule, providing relief to smaller banks that hold under ten billion in total consolidated assets.  However, even if S.B. 215 gets voted down, there is a corresponding bill in the House, the Financial CHOICE Act (H.R. 10).  This is a far more ambitious bill, as it would repeal the Volcker rule completely.

While it is not currently known what the result of the vote will be, for anyone connected to compliance or the executive level of a bank, the future of the Volcker rule must be closely watched.  The Senate has postponed voting on the bill, due to the number of amendments to the bill, so there is a waiting game to be played.