Jan 15, 2014 - 2:15pm

Volcker Rule Makes Main Street Want to Cry

Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness
Senior Advisor to the Senior Executive Vice President

In going after proprietary trading by Wall Street firms, federal regulators have managed to harm community banks, which are a main source of funding for Main Street businesses and that don’t make proprietary bets. NPR recently aired a story titled How A Community Bank Tripped On Footnote 1,861 of the Volcker Rule. NPR spoke to Robert Fisher, president of Tioga State Bank in Spencer, a village in upstate New York with a population of about 800 people. Here’s a clip from the audio portion of the story:

Banks like Fisher’s have money left over that they haven’t lent out to the area, for businesses or to homes or to whatever, and they use that money to buy a popular investment. It’s called a trust preferred security. The footnote makes this investment against the rules. So Fisher is possibly going to have to sell these off and possibly take a hit.

[Fisher]: “It’s 25% of my annual income, so it’s a big deal.”

Nathan Stovell, who covers the banking industy for SNL Financial, says regulators don’t want banks investing in something that can even just smell a little risky. 

It gets worse for banks like Tioga.

Wrapped up in the same issue are collateralized loan obligations (CLOs), which provide $300 billion in annual financing to businesses. The Volcker Rule imperils the $70 billion in CLO financing that banks provide, while risk retention rules could kill the rest. In short, $300 billion in business financing may go down the drain and community banks may be hobbled in their historic role of helping businesses.

Main Street is the innocent bystander in the Volcker Rule debate, and it has taken a first bullet. It can expect to take successive waves of incoming fire as the Volcker Rule slowly becomes operational over the next 18 months. God forbid that some businesses, desperate for capital, are forced to visit the local loan shark and suffer the fate of Robert DeNiro’s Johnny Boy character in the movie Mean Streets.

Though regulators are taking action to correct the community bank problem after heavy Congressional pressure, one-off solutions aren’t conducive to an efficient financing system needed to grow businesses and the economy. A re-proposal to discover Volcker Rule problems and fix them in one fell swoop is the way to go.

The Chamber has called for such a re-proposal, and a Chamber representative is testifying today before the House Financial Services Committee to fix the community bank and CLO problems and has sent letters supporting corrective legislation as well.

Abraham Lincoln once said that he felt “like the boy that stumped his toe: ‘it hurt too bad to laugh, and he was too big to cry.’” It appears that Main Street is going to stump its toe a lot over the next several months, and maybe some crying is needed to fix the situation.

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About the Author

About the Author

Tom Quaadman headshot
Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness
Senior Advisor to the Senior Executive Vice President

Tom Quaadman develops and executes strategic policies to implement a global corporate financial reporting system, address ongoing attempts of minority shareholder abuse of the proxy system, communicate the benefits of efficient American capital markets, and promote an innovation economy and the long-term interests of all investors.