Yesterday, the conference committee that will reconcile the House and Senate versions of financial regulatory reform held its first meeting, with the many members involved giving their opening statements. One of the most important questions that needs to be resolved is over the Volcker rule, the restriction on proprietary trading (banks trading for their own benefit) named after former Federal Reserve Chairman Paul Volcker.
The House bill was passed before the Volcker rule was introduced by the administration, so it only includes a provision allowing Federal Reserve regulators to ban proprietary trading that they feel is too risky. The Senate bill includes a version of the Volcker rule that directs regulators to first study the issue and then design and (maybe) implement it as they see fit.
During the Senate debate though, an even stronger version of the rule sponsored by Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR) never came to a vote, due to some shenanigans from Republicans and Democrats alike (which led Levin and Merkley to attach their plan to an amendment that ultimately got pulled from the floor). But yesterday, Rep. Barney Frank (D-MA), who is chairing the conference committee, said that a strong Volcker rule in the direction of Levin-Merkley is what will ultimately wind up in the bill:
“I think there’s conceptual agreement. You have several things: You have tough regulation of derivatives, which I prefer much of what the Senate did. You’re going to have a tougher version of the Volcker Rule…I would say the general direction that Senators Merkley and Levin were moving in is a direction a lot of people are supportive of, but the final version, we’ll see. It will be tougher than the House. The House simply empowers the regulators. There will be some direction” given to regulators.
Of course, a “conceptual agreement” in the “general direction” of Levin-Merkley does not automatically a good rule make, but this is encouraging. And bank lobbyists are scared enough about a strong Volcker rule to be freaking out about it. “How can they start with something that was never voted on?” one “incredulous” Wall Street executive asked Politico last night.
The banks are angling for not only giving regulators more discretion in implementing the rule, but are searching for carve-outs (which can then be exploited later and turned into full-fledged loopholes). But Volcker himself penned a letter to lawmakers this week warning against creating these sorts of openings, saying “I absolutely oppose any such modification.”
Hard and fast rules, as opposed to guidelines that regulators will feel pressure to remove or moderate, are preferable in the final legislation. It’s good to see Frank moving that way, but I’ll feel better when more conferees come around to that position.