Squeezed in the Middle: Nobody is Happy with the Pace of Implementation of the Volcker Rule


In 1933, Senator Carter Glass and Representative Henry B. Steagall, sponsored the Banking Act of 1933, which has been subsequently known as the Glass-Steagall Act.  Its passage was prompted by the Great Depression, which was partially caused by commercial banks’ overexposure to risk.  Part of this law forced commercial banks to cease brokerage and investment operations, in exchange for insurance under the FDIC.  Part of the logic behind this division was that if commercial banks were going to have their deposits insured by the federal government, through the FDIC, then they would not have a right to profit from that risk.  Commercial banks could not risk money insured by the American Government.  That insurance was intended to re-inspire confidence in the commercial banking system and economy, not just to allow banks to make riskier bets.  However, over the years, Glass-Steagall’s division between commercial and investment became more and more clouded, until 1999, when the Gramm-Leach-Bliley Act formally repealed it.

About a decade later, the financial markets (specifically mortgage markets) began to collapse, eventually sending the United States into a recession.  Many people claimed that the repeal of Glass-Steagall had caused the recession; they claimed that if the commercial banks had been enjoined from exposure to so much risk (which they foolishly overexposed themselves to), then the financial markets would not have suffered such a system-wide meltdown. In other words, the 2008 crisis would have been contained and manageable.  In response to this crisis, Congress passed the Dodd-Frank Act, a broad regulatory overhaul touching on numerous parts of the financial system (For more on Dodd-Frank, please see this blog’s coverage here).  One section of the Act, coined The Volcker Rule (after former Chairman of the Federal Reserve, Paul Volcker), prohibits insured depository institutions from engaging in “proprietary trading,” acquiring, retaining equity in, or sponsoring hedge funds or private equity funds.  It was intended to guard against a similar evil as the Glass-Steagall act by limiting the risk that insured commercial banks could take.  (For a broader look at the arguments for and against it, see this blog’s coverage here).  There have been critics on both sides of the rule, since its conception, with Volcker himself defending it during the comment period.

However, like many Congressional laws, the legislature did not promulgate all of the rules to enforce the bill.  With regards to the Volcker Rule, they left that job to a combination of the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the federal banking agencies.  Those agencies published their respective Notices of Proposed Rulemaking back in the fall of 2011, and the comment period ended on February 13, 2012.  The Dodd-Frank Act was supposed to take effect by July 2012, however this date has come and gone without all of the provisions of the Act, including the Volcker Rule, being implemented.  Rather, the Federal Reserve, and other agencies charged with drafting the Volcker Rule now have until July 2014 to work out the exact details before implementation.

This outcome, however, generally seems to be an unhappy one.  Clearly, proponents of the Volcker rule are upset that it will take almost a half of a decade from when the Dodd-Frank Act was passed until the Volker Rule will be implemented.  Last month, in fact, some of those proponents, organized as “Occupy the SEC,” filed a lawsuit against the FDIC chairman, Comptroller of the Currency, SEC Chairman, CFTC Chairman and the Chairman of the Federal Reserve.  Two of their members claimed standing to file the suit in District Court of the Eastern District of New York, because they have checking accounts at JPMorgan and Wells Fargo.  They are seeking the court to compel the defendants to finalize the Volcker Rule and put it into effect.

On the other end of the spectrum are the big banks who, on the one hand, are holding out hope that the Volcker rule can be undone.  However, many are resigned to its implementation, and have begun the process of spinning off their hedge fund businesses.  For these banks, the longer the agencies take to finalize the rules, the shorter time they will have to bring their businesses into compliance.  Furthermore, although advocates of the bill Volker Rule imagine bankers running around, carelessly investing deposits, during these years, in reality, the banks are in limbo, not knowing whether they can invest this money or if they need to begin winding up their investment divisions.  On April 19, 2012, the Fed issued an interpretation that “every banking entity that engages in an activity or holds an investment covered by [the Volcker Rule]is expected to engage in good-faith efforts, appropriate for its activities and investments, that will result in the conformance of its activities to the Volcker Rule.”  These delays are benefitting no one; however, much like the federal government as a whole, inability to negotiate and compromise has brought these agencies to a standstill.

This hurts everyone because, however you feel about how the Volcker Rule will affect our financial system, one thing seems to be clear: uncertainty is bad for industry.


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Fordham Journal of Corporate & Financial Law