During the final hours of debate over what became the Dodd-Frank financial reform law, lawmakers inserted an exemption to the Volcker rule, which is meant to prevent banks from trading for their own benefit with federally insured money. Added at the behest of Sen. Scott Brown (R-MA), the exemption allows banks to invest three percent of their capital in risky hedge funds and private equity firms.
This was a lousy compromise that undermined the original goal behind the Volcker rule. Former Federal Reserve Chairman Paul Volcker — for whom the rule is named — expressed disappointment at the time that the rule had been diluted. “Allowing a bank to invest in a speculative fund goes against the very intent of the bill as we seek to define those activities that are worthy of government protection,” he has said.
And now, with financial reform no longer in the headlines, the banks are hoping to make the already weakened rule even weaker:
In comment letters to regulators studying how to implement the rule, banks are seeking laundry lists of carve-outs, including broad exceptions from what is considered proprietary trading and greater freedom to invest in private-equity firms and hedge funds…The length and breadth of the exceptions being sought run the gamut.
Specifically, Bank of New York Mellon, Northern Trust, and State Street are looking to exempt certain investments from counting towards the three percent cap.
Volcker, for his part, has been warning the regulators against watering the rule down any further. “Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law,” he said. A group of Senators led by Sen. Carl Levin (D-MI) — who was one of the Volcker rule’s biggest advocates during the financial reform debate — have also penned a letter to regulators stating that “[Congress] provided you with a clear mandate and broad authority to act. The American people are now relying upon you to fully carry out the law.”
American Banker characterized the financial services industry as desiring “so many exceptions from the Volcker Rule’s limits on risky activities that it might as well not exist at all.” If regulators give in to the industry’s demands, the rule will indeed amount to nothing.