A new regulation meant to prohibit federally-insured banks from engaging in risky trading practices will cost the nation’s largest financial institutions more than twice as much as originally estimated, according to a new analysis by ratings agency Standard & Poor’s. But the rule would also make those banks less of a risk to the U.S. economy, S&P found.
The Volcker Rule, which will keep banks that are backed by taxpayers from engaging in the risky proprietary trading that played an outsized role in bringing down the financial market four years ago, will cost the nation’s eight largest banks up to $10 billion in annual profits, two-and-a-half times as much as S&P estimated in 2010:
“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue.
Still, that will hardly put a dent in their collective profits. The eight banks — JP Morgan Chase, Morgan Stanley, Bank of America, Goldman Sachs, Wells Fargo, U.S. Bancorp, Citigroup, and PNC — earned more than $63 billion in combined profits in 2011 as Wall Street continued to rebound from the financial crisis. JP Morgan ($19 billion) and U.S. Bank ($4.9 billion) each posted record profits last year; Wells Fargo ($15.9 billion) and Citigroup ($11.3 billion) joined JP Morgan as the three banks to earn more than $10 billion in profits individually.
And, as S&P noted, less risky trading will lead to safer banks. “The implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk,” S&P said. “This risk mitigation could lessen revenue and earnings volatility, which we would view favorably.”
Wall Street has attempted to water down the Volcker Rule since its insertion into the Dodd-Frank Wall Street Reform Act in 2010. They were successful in lobbying for a loophole that allowed them to continue some risky trading practices, and since the law’s passage, the banks have attempted to make the rule even more tepid. Regulators are scheduled to finalize the proposed rule by the end of this year.