December 14, 2013
Volcker Rule Is Finalized
by Robert Kropp
After delays that gave rise to fears of gaming by banking industry lobbyists and led to a lawsuit
by Occupy SEC, federal regulators finally issue final rules implementing the Volcker Rule.
More than three years after its inclusion in the Dodd-Frank financial reform legislation, the Volcker Rule has been
issued by five federal regulatory agencies, including the US Treasury, the Federal Reserve, and the
Securities and Exchange Commission (SEC).
The rule as issued runs to almost 900
pages although its intent is specific: to prevent big banks from repeating the proprietary trading
that led to the financial crisis and a subsequent recession whose effects are still being felt,
especially by the poor here in the US and across the globe.
“The purpose of the Volcker
Rule is basically to de-risk the financial system,” Harvard business professor emeritus Malcolm
Salter said in a podcast after
the final rule was issued. “The idea is to avoid another 2008-type crisis.”
the SEC, “The final rules prohibit insured depository institutions and companies affiliated with
insured depository institutions ('banking entities') from engaging in short-term proprietary
trading of certain securities, derivatives, commodity futures and options on these instruments, for
their own account. The final rules also impose limits on banking entities’ investments in, and
other relationships with, hedge funds or private equity funds.”
“The basic idea of the
Volcker Rule it to list those kinds of trading activities which are permissible, and differentiate
those from which are impermissible,” Salter said. “The impermissible ones basically relate to using
funds and assets on deposit by depositors in deposit taking institutions which are federally
insured: to prohibit those funds to be used to trade on the bank's own account. The idea is not to
put depositors' funds at risk.”
A press release
issued by the SEC includes a long list of exemptions, suggesting that regulatory enforcement
effective enough to prevent gaming of the rule by banks' trading desks will be challenging.
“There's lots of ambiguity and there are exemptions that will be quite controversial,” Salter
observed. “Trading in government securities, for example.”
“Finance has never met a rule
that they haven't wanted to game,” he said. “The problem in the Volcker Rule is differentiating
between two types of proprietary trading. There is no clear line but there is a difference in
“We won't really know if it's gaming until we see what their behavior is,” he
Nevertheless, some initial reports suggest that the rule as issued could hold banks
to more exacting standards than previously expected. The New York Times reported that for banks to exploit some of
the exemptions included, they would have to “identify the exact risk that is being hedged. The
risks, the rule said, must be 'specific, identifiable' rather than theoretical and broad.”
Also, The Times continued, the rule “requires chief executives to attest that they have
established programs for complying with the rule.”
That the regulators arrived at a rule
somewhat more stringent than many expected should be welcome news to sustainable investors. Members
of the Interfaith Center on Corporate Responsibility
(ICCR), for example, have engaged with banks over issues relating to proprietary trading since
long before the financial crisis, and many firms and organizations have spoken out publicly in
support of the Volcker Rule even before it was included in Dodd-Frank.
Also taking an
activist role in support of a Volcker Rule with teeth is Occupy the SEC (OSEC), which in 2012 submitted a 325-page
comment letter to the SEC calling for a meaningful implementation. The rule, OSEC stated, "is
important to the future of the banking industry and, if strongly enforced, will help move our
financial system in a more fair, transparent, and sustainable direction."
the lack of progress in implementing the rule, OSEC filed a lawsuit against the regulators earlier
this year. "Almost three years since the passage of the Dodd-Frank Act, these agencies have yet to
finalize regulations implementing the Volcker Rule," the lawsuit stated. "The longer the agencies
delay in finalizing the Rule, the longer that banks can continue to gamble with depositors' money
and virtually interest-free loans from the Federal Reserve's discount window."
final rule was issued, Akshat Tewary of OSEC told the Washington Post, “The final rule was a little stricter on banks
than the proposal was. I think that had a lot to do with the London Whale fiasco from last year.”
Noting that the text of the rule cited OSEC 284 times, Tewary added, “The number of times
that they cited us suggests that regulators are subject to public oversight. It was heartening to
be part of that conversation, and I think it indicates there's potential for that kind of activism
So at this point it would seem premature for sustainable investors to
dismantle their costly and time-consuming practice of engaging with banks on this particular matter
of corporate social responsibility. But a rule is in place that didn't exist before, and banks are
on notice that their adherence to the rule will be scrutinized..
“There's going to be a
breaking in period,” Salter of Harvard said. “Simple rules for a complex issue are not going to be
easy. Not that there won't be people trying to cut corners but I don't think the government is
going to be ham handed.”
“Good will will win out,” he added hopefully.