Former Federal Reserve Chairman Paul Volcker. (AP Photo/Seth Wenig)
The Volcker Rule has hit a number of speed bumps recently. The rule is a proposed bit of regulation included in Dodd-Frank that would prevent banks from investing their own funds for profit, a practice called proprietary trading. It was designed to reinstitute some of the separation between investment banks and commercial banks that was lost when the Glass-Steagall Act was repealed in 1999.
When the rule was initially proposed by Paul Volcker, the former United States Federal Reserve chairman, it was estimated that it would cost big banks engaging in the practice about $4 billion dollars in pre-tax earnings annually. In October, the S&P released a report revising that estimate to $10 billion. According to Bloomberg, the S&P analysis looked at the profits of 8 U.S. banks, including JPMorgan, Goldman Sachs and Morgan Stanley.
JPMorgan’s $6 billion trading loss earlier this year was characterized by some in Washington as a “case study” on the need for more oversight. The S&P also noted in their report that “the implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk.” But some bank executives, including Morgan’s Jamie Dimon, contend that the restrictions are unnecessary.
Congress originally mandated that the Volcker Rule would go into effect in July 2012, two years after Dodd-Frank was passed. But the five regulatory agencies drafting the rule didn’t meet their deadline. In fact, the rule is still being drafted.
The regulators working on the rule recently estimated that it will be finished sometime during the first few months of 2013. But the rule-drafting process might be slowed even further by the Securities and Exchange Commission: Chairman Mary Schapiro will be stepping down this month, and without Schapiro the remaining four members of the commission will face a partisan divide that will slow down decision-making.
Last week, the chairman of the House Financial Services committee, Spencer Bachus (R-AL), and his successor as chairman, Jeb Hensarling (R-TX), sent a letter to regulators asking that the rule not go into effect until two years after the final version is finished being drafted. The House Financial Services committee also announced a hearing to look into the rule’s implementation, beginning Dec. 13.
Paul Volcker appeared on Moyers & Company last April. Watch the full interview below.
