Banking sea change with Volcker Rule
WITH the release of the Volcker Rule, the Dodd-Frank Act's regulatory overhaul is largely complete, giving banks a new degree of certainty about the limits of their business in the wake of the 2008 financial crisis.
The rule, issued on Tuesday by five United States agencies, bars banks from speculating with their own money.
Another milestone in the implementation of Dodd-Frank is the setting up of the Consumer Financial Protection Bureau, the entirely new agency that monitors consumer lending.
"No regulatory reform effort is perfect, but I think we have made progress on the problem of too big to fail," said Dr Michael Barr, a law professor at the University of Michigan who helped write Dodd-Frank when he served as the Treasury Department's assistant secretary for financial institutions from 2009 to 2010.
In the three years since Dodd-Frank was enacted, regulators have also completed guidelines on how the government will dismantle the largest financial institutions when they fail, taken steps to make derivatives trading more transparent, increased the amount of capital banks must hold, and defined which mortgages are considered risky.
"You can see the light at the end of the tunnel for the most important components of the rulemaking process," said Mr Isaac Boltansky, an analyst at Compass Point Research & Trading in Washington. "The most visible components of the Dodd-Frank Act are nearly finalised."
To be sure, about a third of the hundreds of rules mandated by Dodd-Frank remain to be written or completed, including those governing credit-rating firms and the disclosure of counterparty credit risk.
Banks are challenging some derivatives regulations in court. They've also managed to reduce the impact of some changes through intense and sustained lobbying as the rules are being written.
Among the remaining mandates are higher bank-liquidity requirements to comport with Basel III agreements and the removal from Securities and Exchange Commission (SEC) rules of third-party credit ratings as an acceptable measure of creditworthiness.
"With today's approval of the Volcker Rule, regulators have taken a critical step towards completing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act," Treasury Secretary Jacob Lew said in a statement yesterday. "The Volcker Rule will change behaviour and practices in our financial markets to safeguard taxpayers from risks created by banks' proprietary trading."
Anticipating the Volcker Rule, many banks shut their proprietary trading desks or broke off standalone groups that traded separately from units that serve clients.
Nonetheless, banks still fought regulators on the details of the rule, named for former Federal Reserve chairman Paul Volcker, who advocated for it as an adviser to President Barack Obama.
The lobbying is one reason it took regulators more than two years to come out with a final version after they released an initial proposal in 2011.
Business groups, which have sued to overturn several Dodd- Frank rules based on the quality of regulators' economic analysis, have signalled that they may challenge the Volcker Rule in court.
"We will now have to carefully examine the final rule to consider the impact on liquidity and market-making," Mr David Hirschmann, president of the US Chamber of Commerce's Center for Capital Markets Competitiveness, said.