Volcker rule

From MarketsWiki
Revision as of 16:50, 6 October 2011 by NicoleRohr (Talk | contribs)

Jump to: navigation, search
Not impressed? Tell us how to improve it or sign up to edit.
RJO-logo.gif

The Volcker rule, as approved by the U.S. Senate in May 2010, would have banned U.S. banks from trading with their own capital and running hedge funds.[1] It is named after former Federal Reserve Chairman Paul Volcker. It was softened in the final financial reform legislation - called the "Dodd-Frank bill" - that Congress approved on June 25, 2010. The legislation will allow banks to invest in private-equity and hedge funds, although they will be limited to providing no more than 3 percent of the fund’s capital. They also cannot invest more than 3 percent of their Tier 1 capital.[2]

This change was offered by Senate Banking Committee Chairman Christopher Dodd. The modification was a concession to Senator Scott Brown, a Massachusetts Republican who was concerned the ban would harm the Boston-based State Street Corp. He was one of four Republicans to break party ranks and vote for the Senate bill.

Banks Express Concern About Rule

It's been estimated that the rule could cost Goldman Sachs - whose business is weighted toward trading - at least $3.7 billion in annual revenue. Lobbying disclosures show Goldman representatives have been working both sides of the political aisle and meeting with top officials in the White House and regulatory agencies. One big area of concern for Goldman is that regulators who are interpreting the Volcker Rule will severely limit the amount of time a bank can hold a security or derivative.[3]

Other banks including Bank of New York Mellon Corp. and State Street Corp. also lobbied to stop the rule from going into effect. The banks were concerned that it might curtail their asset-management activities, since many of their funds could be considered hedge funds.

President Barack Obama introduced the rule in January 2010 with Volcker standing beside him. Because it was after the House had already passed its version of financial reform, the Volcker rule was included in the Senate package only, guided through the chamber by Senate Banking Committee Chairman Christopher Dodd. [4]

A Bloomberg report out in late June 2010, citing a person close to Volcker, said the former Federal Reserve Chairman was disappointed with what he considered to be a diluted final version of the rule that bears his name. Initially, the Volcker rule would have banned banks from running private-equity and hedge funds but last minute congressional negotiations aimed at winning Republican support led to a compromise that allows banks to invest up to 3% of their capital in such funds. Volcker was said to be content with language that bans banks from trading with their own capital.[5]

Volcker said in a statement released June 28, 2010 that the bill agreed upon by congressional negotiators provides a constructive legal framework for reform of the financial system. He said that among the bill's provisions "are strong restraints on proprietary trading by commercial banking organizations, a point that has been of particular interest to me."[6]

In January 2011, many of the big investment banks on Wall Street testified to Congress against the Volcker rule opposing the notion that prohibits any banking activity that doesn't directly service the customer. These activities include proprietary trading, investment banking advisory services as well as hedge fund or private equity involvement. Experts believe that even if Volcker does not succeed, the banking and speculative industry will experience much stricter markets. [7]

References

  1. Volcker Sidelined as Obama Reshapes Advisory Panel. Bloomberg.
  2. Biggest Wall Street Revamp Since 1930s Approved. Bloomberg Businessweek.
  3. Goldman lobbying hard to weaken Volcker rule. Reuters.
  4. Volcker Rule Under Attack as Lawmakers Seek Loophole. Bloomberg.
  5. Volcker Said to Be Unhappy With New Version of Rule. Bloomberg.
  6. Volcker Said to Be Unhappy With New Version of Rule. Bloomberg.
  7. Wall Street Takes Aim at Volcker Rule. The Street.