The Volcker Rule, one of the more controversial provisions of the Dodd-Frank bill, is finally being hammered out by regulators in Washington this week. The rule will prohibit banks that take deposits from engaging in proprietary trading, or investing in hedge funds and private equity firms, a change that will seriously cut into their profits.
The rule, named for the man whose idea it was, former Federal Reserve Chairman Paul Volcker, has taken quite some time to be implemented. It was included in the Dodd-Frank financial reform bill, and has been undergoing review by various regulatory bodies in Washington, including the FDIC and the SEC.
What is the Volcker Rule?
The rule aims to protect consumers and taxpayers from banks making risky trades to improve their bottom line. Proprietary trading, when banks make trades with their own capital instead of their depositor’s money, will be seriously limited once the rule goes into effect. Not only will taxpayers have to worry less about a potential bailout situation, but banks will be compelled to invest in things that create value like small business loans, or so regulators hope.
On Tuesday the FDIC unanimously approved the rule unanimously, releasing it for public comment through January 13 of next year.
Wednesday, the Securities and Exchanges Commission (SEC) passed the rule unanimously, too, also bringing it to public comment, reports DealBook.
A Lot of People Will Have to Sign Off on the Volcker Rule
The rule must be reviewed by the above two regulatory bodies, as well as the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission, and all four versions will have to be made into a comprehensive set of regulations.
In addition to that, both consumer groups and banking industry lobbyists will try to push their own agendas onto the rule during the public comment phase.
Since the Durbin amendment went into effect, cutting into banks’ profits by limiting interchange fees, customers have been forced to bear the brunt of the revenue loss, at least at some larger banks like Bank of America® and Citibank.
Notably, both Bank of America® and Citibank have cut back on their proprietary trading desks in anticipation of the passage of the Volcker rule (Citi did back in June, as did BofA). It seems that this new regulation is already priced in to the way the two have been conducting business and levying fees, one hopes. They publicly cited the Volcker Rule as the reason for summer downsizing, and blamed the Durbin rule for the new fees.
It does not seem that far out of the realm of possibility that, once Volcker goes into effect next year, banks will again turn to their customers for fees.