Comptroller of the Currency Joseph Otting has signed a final rule amending the Volcker Rule to tailor and simplify the rule while, “maintaining protections core to the safety and soundness of the federal banking system,” a release from the agency read.
“After extensive comment and feedback through the rulemaking process, I am pleased to approve changes to the Volcker Rule that simplify the rule in a common sense way that preserves the safety and soundness of the federal banking system and eliminates unintended consequences of the prior rule,” Otting stated.
Noting that following the financial crisis banks took steps to recapitalize their balance sheets, restore liquidity and improve their risk management in responsible ways, Otting continued, “National banks and federal savings associations exited the behaviors and practices that some saw as threats to the insured deposits. The limits and protections put in place by the prior version of the Volcker Rule remain to ensure inappropriate risk practices do not recur. At the same time, we have made substantial progress eliminating ineffective complexity and addressing aspects of the rule that restrict responsible banking activity based on our experience with the rule.”
The final rule will:
- Tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities, with the most stringent requirements applied to banking entities with the most trading activity;
- Retain the short-term intent prong of the “trading account” definition from the 2013 rule only for banking entities that are not, and do not elect to become, subject to the market risk capital rule prong;
- Replace the rebuttable presumption that instruments held for fewer than 60 days are covered under the short-term intent prong with a rebuttable presumption that instruments held for 60 days or longer are not covered;
- Clarify that banking entities that trade within internal risk limits set under the conditions in this final rule are engaged in permissible market making or underwriting activity;
- Streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
- Limit the impact of the rule on the foreign activities of foreign banking organizations; and
- Simplify the trading activity information that banking entities are required to provide to the agencies.
“One of the post-crisis reforms that has been most challenging to implement for regulators and industry is the Volcker Rule, which restricts banks from engaging in proprietary training and from owning hedge funds and private equity funds,” said Jelena McWilliams, FDIC Chair. “Distinguishing between what qualifies as proprietary trading and what does not has proven to be extremely difficult. Meanwhile, banks that do relatively little trading are required to go through substantial compliance exercises to ensure that activities that have long been considered traditional banking activities do not run afoul of the Volcker Rule.”
As would be expected, industry players weighed in on the announcement. Speaking for the American Bankers Association, President and CEO Rob Nichols said, “We appreciate the actions taken … by the FDIC and OCC, which have started the agencies’ process of finalizing sensible reforms to the Volcker Rule that will help banks serve their customers and the broader economy. These improvements will allow bank supervisors to focus on systemic risk, while providing the tailored and precise oversight that was the Volcker Rule’s original purpose.”
Nichols “applauded” regulator for scrapping the proposed accounting test, which he characterized as “overly broad and unworkable.” He also reaffirmed the ABA’s commitment to advocating for further changes that “would simplify and streamline restrictions on covered fund investments while excluding funds that are clearly outside the Volcker Rule’s intent,” he said.
However, not everyone is a fan of the reforms. Martin J. Gruenberg, member of the FDIC’s board of directors, who voted against the final rule, stated, “The final rule … would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits.”
Gruenberg believes that because of the narrower definition of trading account, the newly finalized rule will capture more than $1.8 trillion of financial instruments, which will result, at the bank holding company level, in about 25 percent of the financial instruments subject to the 2013 current rule and the 2018 Notice of Proposed Rulemaking no longer being subject to the prohibition on proprietary trading.
“At the bank level, based on publicly available Call Report data as of year-end 2018, the impact of the final rule would be far more severe,” Gruenberg’s statement read. “Under the 2013 current rule and the 2018 NPR, a total of nearly $1.2 trillion of financial instruments would be subject to the Volcker Rule prohibition on proprietary trading at the bank level. Under the final rule before the board today (Aug. 20), $635 billion of financial instruments would be subject to the Volcker Rule. In other words, at the bank level, the final rule would exclude about 46 percent — nearly half — of financial instruments from the Volcker Rule that are subject under the 2013 current rule and the 2018 NPR.”
By excluding these financial instruments, Gruenberg posited the new rule “opens up vast new opportunity — hundreds of billions of dollars of financial instruments — at both the bank and bank holding company level, for speculative proprietary trading funded b the public safety net.” Gruenberg further believes the final rule will increase difficulties for examiners who wish to take supervisory action based on safety and soundness concerns.
Concluding, Gruenberg stated, “Given the severe narrowing of the scope of financial instruments subject to the Volcker Rule … the Volcker Rule will no longer impose a meaningful constraint on speculative proprietary trading by banks and bank holding companies benefitting from the public safety net. For that reason I will vote against this final rule.”
Upon publication in the Federal Register, the final rule will have an effective date of Jan. 1, 2020, and a compliance date of Jan. 1, 2021. However, a banking entity may voluntarily comply, in whole or in part, with the changes to the rule prior to Jan. 1, 2021.