Financial Firms Hand-Wringing Over Volcker Implementation

The lack of clarity in interpretation and enforcement of the Volcker rule was the over-arching concern of several banking industry executives who testified before the House Financial Committee today. The Volcker rule, approved in December, is meant to rein in risk-taking by banks, especially the kinds of risk-taking that led to the 2008 financial collapse. But bankers warned Congress that with five separate agencies charged with implementing the rule – the SEC, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC – and no clear roadmap for how that will work, the stage has been set for massive confusion once the 18-month period banks will have to conform to the new rules kicks off later this year.

“[J]ust as the five regulators ultimately coordinated to write one rule they must now coordinate and be consistent in their interpretation, examination, supervision and enforcement of the final regulations,” Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association, told the committee. “A lack of consistency will not only create unnecessary and costly confusion for the industry, our clients and the markets, it will undermine the rule itself. … Regrettably, the final regulations are silent on regulatory coordination.”

Speaking for the U.S. Chamber of Commerce, David Robertson of Treasury Strategies Inc. told the committee, “the Volcker rule won’t be implemented in a vacuum; we’re in a time of unprecedented regulatory change.” That is worrisome for the banking industry, Robertson said, because “capital investment by business requires a stable and predictable regulatory environment.”

For the Volcker rule to work, “it is critical that its interpretation and enforcement be harmonized amongst all of the regulators to provide clear rules of the road,” Robertson told the committee.

Regulators Point To CDO Amendment To Show Flexibility In Implementation

Lawmakers in support of the Volcker rule pointed to an amendment made Jan. 14 to prevent smaller banks from being forced to take a write-down on some collateralized debt obligations many held before the financial crisis. All five Volcker regulators agreed to the amendment after the banking community balked at how the rule was going to impact small banks, in contradiction to the stated intent of the rule.

That kind of responsiveness should bolster confidence among bankers, some lawmakers said at today’s hearing. “I think that we should be focused more on what we can do to implement Volcker, because it is the law, but at the same time deal with any unintended consequences,” Ranking member of the committee Rep. Maxine Waters (D-Calif.) said. “Since we’ve already demonstrated we’re willing to do that, and the regulators are too, let us focus on what we can do to deal with the issues we’re concerned with.”

While the amendment was responsive, some said it mainly proves regulators wrote the rule in haste, and in some instances had not fully thought it out.

“The amendment is helpful but it’s indicative of problems within the rule itself,” Bentsen said. In lieu of coordinated regulatory oversight, Congress can and should continue to play a role, Bentsen suggested. “The coordination issue is huge. Congress absolutely has a role to play … to oversee the rule and make sure it’s implemented as intended,” he said.

The 18-month conformance period may seem lengthy to some, given the scope of issues that may arise in that time. Bentsen said, “In order to lessen the potential negative market impacts, regulators should consider, as issues arise, giving particular markets or products additional time to comply.”