Democratic lawmakers on Thursday criticized regulators for taking too long to finalize the Volcker Rule, a controversial provision passed in 2010 aimed at restricting banks from making risky investments with their own money.
People familiar with the matter say a rift has developed between bank regulators and the nation’s top markets regulator over how the rule should be shaped. That could delay a final draft beyond the end of the year, an informal deadline set by the Obama administration, those people said.
Banking regulators have crafted an outline of the proposal, showing the most progress they have made on the complex rule, the people said, speaking on condition of anonymity because the draft was not final.
But these officials face opposition from the Securities and Exchange Commission. Now the banking regulators must decide whether to move ahead on their own and risk damaging their relationship with the SEC or accept further delays.
On Thursday, Democratic Sens. Carl Levin (Mich.) and Jeff Merkley (Ore.) said the uncertainty surrounding the Volcker Rule jeopardizes the health of the economy. Banks should be serving American borrowers, not making risky bets, they wrote. The two lawmakers drafted the legislative language of the rule as part of the Wall Street reform bill known as Dodd-Frank.
“Ongoing failure to implement these important protections has left . . . our economy at greater risk of another financial crisis,” the senators wrote in a letter to the heads of five financial regulators.
During the legislative debate, Merkley and Levin spearheaded the amendment banning banks from using their own capital to make trades, a practice known as proprietary trading. The provision called for stricter prohibitions than what was initially proposed by former Fed chairman Paul Volcker.
Proprietary trading has produced tremendous profits for financial firms but has also been blamed for huge losses during the height of the financial crisis. JPMorgan Chase’s $5.8 billion trading loss this year brought the issue back into focus as Congress questioned whether a functioning Volcker rule could have prevented the event.
But critics of the legislation argue that the rule unnecessarily limits some safe forms of trading and will severely affect profit at some of the nation’s largest banks. Ratings agency Standard & Poor’s issued a report this week the Volcker rule could reduce pre-tax earnings for the eight largest banks by up to $10 billion a year. Investment banks Morgan Stanley and Goldman Sachs stand to lose the most because a hefty percentage of their revenue is derived from trading.
The people familiar with the Volcker debate said the JPMorgan trading loss was the catalyst that prompted the heads of the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to work together to engineer a final rule. The Commodity Futures Trading Commission, the other agency involved in the rulemaking, has expressed little objection to the work by the banking agencies.