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Washington is currently taking a very close look at one of its biggest unforced errors: Section 619 of the Dodd-Frank Act, also known as the Volcker Rule.
The Volcker Rule sounds simple in principle: prohibit federally insured depository institutions from trading on their own account, also known as proprietary trading. However, this was not a cause of the financial crisis and even the namesake of the regulation, Paul Volcker, concedes that “proprietary trading in commercial banks was... not central.” Despite this, financial regulators moved forward with implementing a rule without producing a cost-benefit analysis to justify it.
Trading by banking entities, especially in the form of market-making, helps maintain liquidity, by ensuring there is enough inventory to meet the needs of buyers and sellers. It is a big part of the reason the U.S. capital markets are the most deep, liquid, and accessible in the world, which contributes to lower costs for Main Street businesses and consumers.
From the first discussion of the Volcker Rule through the years-long implementation process, the U.S. Chamber warned that the rule is a solution in search of a problem and that its ambiguities have rendered it unworkable. The U.S. Chamber also cautioned that the rule would degrade U.S. businesses’ ability to access the debt and equity markets, and now, there is mounting evidence demonstrating that those concerns are manifest.
Recent economic studies by the Federal Reserve and surveys of market participants have documented the Volcker Rule’s negative impacts on the ability of U.S. corporate treasurers to access capital markets and manage cash. A report from the Federal Reserve notes that “bonds are less liquid during times of stress due to the Volcker Rule.” In 2016, the U.S. Chamber released a survey of more than 300 corporate finance professionals, which found that the Volcker Rule was one of the top concerns.
The evidence is sufficiently clear that even Fed Governor Daniel Tarullo – the Board’s de facto regulatory czar during the Obama era – conceded that the rule was “too complicated” and “may be having a deleterious effect on market making.”
As an alternative, the U.S. Chamber proposed higher capital standards as a pro-growth means of promoting financial stability. Instead, there is now the Volcker Rule and higher capital standards, a combination that has gummed up the works by making the debt and equity markets less efficient while restricting lending to Main Street businesses.
Federal financial regulators, with leadership from the Treasury Department, have proposed important reforms to the Volcker Rule, and Vice Chairman for Supervision Randal Quarles at the Federal Reserve – the agency widely viewed as the lead on Volcker Rule reform – has individuated his preference for the process to “proceed with dispatch.” Financial regulators must not fall victim to errors of the past, such as inordinate data collection requirements or overly narrow interpretations of the prohibition on investing in covered funds, as they make changes.
The recent proposal by banking regulators to fix the Volcker Rule is an important step in removing the gunk that is clogging the growth engine.
The U.S. Chamber provided feedback on that proposal, applauding financial regulators efforts to simplify compliance with the Volcker Rule, but warning against changes that could make our capital markets worse off.
Deep, liquid, and accessible capital markets have contributed to the strength of a U.S. economy that is the envy of the world, and it’s critical to remedy the Volcker Rule. Fortunately, regulators and Congress appear ready to roll up their sleeves, and the Chamber is prepared to work with them.