January 17th, 2012
Econintersect: Oliver Wyman, a subsidiary of insurance giant Marsh & McLennan Cos., has written a couple of reports, very critical of the proposed Volcker Rule portion of the 2010 Dodd-Frank Financial Reform Act. The Volcker rule is explained by Wikopedia as a “ban on certain kinds of speculative investments that do not benefit their customers.” Another definition found at Investopedia states “the Volcker rule basically stops banks from doing their normal business (installment loans, residential mortgages, equity credit loans, deposit services) as well as trading on their own behalf.” These two definitions are not only not on the same page, they are not even in the same book, or even in the same library. One might say they are not even from the same planet.
If the people who wrote the Investopedia description of the Volcker Rule are related to the people who wrote the Oliver Wyman report, that might put a slant on some of the conclusions drawn about reduced liquidity resulting from the rule:
- It could cost investors $90 billion to $315 billion in mark-to-market loss of value on their existing holdings as assets start to freeze up.
- It could hit corporate issuers with an additional $12 billion to $43 billion annually in borrowing costs if investors demand higher interest payments as their holdings grow increasingly illiquid.
Here is the overview published by the Securities Industry and Financial Markets Association (SFMA):
As part of the Dodd-Frank Act, Congress adopted a ban on proprietary trading and restricted investment in hedge funds and private equity by commercial banks and their affiliates, the so-called “Volcker Rule.”
The proposals are named after their creator, former Federal Reserve Chairman Paul Volcker. The original proposals prohibited banks from trading on a proprietary basis – trading using the firm’s own funds – for purposes that are unrelated to serving clients. It also would have prohibited banks from owning, investing in or sponsoring a hedge fund or private equity fund. The rule would have also limited the size of financial institutions by market share.
The proposal was introduced after the House of Representatives passed its version of financial regulatory reform. The Senate chose to include the rule in their legislation as it was proposed by President Obama. A revised version of the rule was ultimately adopted by the Congress and was then signed into law on July 21, 2010 by President Obama as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The final Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricted investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and risk management. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions have a seven year timeframe to become compliant with the final regulations.
On October 11, 2011, the Federal Deposit Insurance Corporation (FDIC) proposed rules that would implement the statutory Volcker Rule. The rule was co-proposed by the U.S. Department of Treasury’s Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), FDIC and the Securities and Exchange Commission (SEC). Originally, regulators set January 13, 2012 as the deadline for public comment on the proposed rules. On December 23, 2011, the regulators extended the comment period until February 13, 2012.