As I’ve been documenting, Republicans on the House Financial Services Committee have set their sights on weakening some of the key provisions in the Dodd-Frank financial reform law. One of these is the Volcker rule — named after former Federal Reserve Chairman and current Obama administration adviser Paul Volcker — which is aimed at preventing banks from trading for their own benefit with federally insured funds.
Banks are already thumbing their nose at the Volcker rule and laying the groundwork for a return to risky trading; they’re taking advantage of Dodd-Frank’s infancy, going on new adventures as regulators work out what, exactly, the Volcker rule should outlaw. And the banks are betting that the GOP will push regulators into making exceedingly narrow, so that risky (but profitable) trading can go on unabated.
But Volcker is pushing back, telling regulators to leave the rule more open, thus allowing them to crack down on a potentially wider range of activities:
His suggestion: Bar banks from trading with their own funds if they benefit from any type of government guarantee, such as deposit insurance, these people said. Banks would have to police their own activities to make sure they are in compliance, with Federal Reserve examiners ensuring that is the case…Mr. Volcker’s concern, according to several people familiar with the matter, is that narrow or prescriptive rules would invite gamesmanship on the part of banks and could allow firms to evade the rule’s intent. Already, some banks and their lobbyists are seeking to sway regulators and encourage them to narrowly define certain types of trading activities.
Volcker is not alone in his attempt to push regulators into a more inclusive rule. 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 — 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.” “Congress voted for change and we need the regulators to move forward with change. They shouldn’t be giving away the ranch so we get back in this situation again,” said Sen. Tom Udall (D-NM), one of the letter’s signers.
Volcker was reportedly disappointed in the final version of his rule, after exemptions were added to it in an attempt to win Republican votes for Dodd-Frank, so it’s not surprising that he’d go to bat to prevent even more backsliding. And that he has to wrangle with the regulators at all is symbolic of both the promise and potential pitfalls in Dodd-Frank: depending on how the regulators craft the rules, the law could be extremely effective or simply window-dressing.