Big banks spent years railing against the so-called Volcker rule, which bars them from making wagers with their own money. Now, with the imminent arrival of the Trump administration, some banks and lawyers are eyeing a new way to defang the rule: Simply stop enforcing it.
The rule, named for former Federal Reserve chairman Paul Volcker, was one of the most controversial pieces of the 2010 Dodd-Frank financial-overhaul law, passed in the wake of the financial crisis. The provision was intended to rein in reckless risk-taking by big banks, but critics complain that it is unduly burdensome to comply with and deprives them of a lucrative money-making opportunity.
The election of Donald Trump as president poses a threat to the rule, as his campaign promised to dismantle the Dodd-Frank law.
Getting rid of the Volcker rule would require an act of Congress. House Financial Services Committee Chairman Jeb Hensarling (R., Tex.) proposed to repeal the rule this year as part of a package of changes to Dodd-Frank. But repealing the rule could be difficult, likely encountering a roadblock in the Senate, where the support of some Democrats would be necessary to ensure passage.
But neutering the Volcker rule, which took effect in July 2015, would be comparatively easy.
While the rule is enshrined in the Dodd-Frank law, the provision instructed regulators to write the rule’s fine print. That process required several years of negotiations among five independent regulatory agencies.
Even so, enforcing the rule remains subject to considerable interpretation. Financial firms are allowed to trade in stocks and bonds so long as their holdings do not exceed the “reasonably expected near-term demand” of their customers. But just how so-called RENT-D is calculated is subjective; there isn’t one single formula.
That subjectivity has some industry officials optimistic that regulators appointed by the new Trump administration will change their agencies’ interpretations of the rule or tell the officials charged with enforcing it to hold back.
“Once you have the heads of the executive agencies in place, at that point they can change enforcement priorities and guidance,” said David Freeman, the head of the financial services practice at law firm Arnold & Porter. “A lot can be undone or rethought once you have fresh eyes looking at the issue.”
Further complicating matters—and empowering regulators to soften their approaches—a hodgepodge of federal agencies are responsible for overseeing different trading desks within the same banks.
For example, the Office of the Comptroller of the Currency, which is part of the Treasury Department, oversees trading within national banks. The Securities and Exchange Commission looks after broker-dealers. And the Commodity Futures Trading Commission monitors swaps dealers. A single bank holding company—say, J.P. Morgan Chase & Co. or Citigroup Inc.—could have all three of those financial entities as subsidiaries.
Regulators have only begun to examine how banks are complying with the rule. Supporters and critics of the rule alike question whether, in practice, the agencies will agree about issues such as whether a particular trade violated the rule. The diffuse responsibility for enforcing the rule creates an opening for the Trump administration to hit the “pause” button.
“I would think that the administration might rein in the staff while they go in and kick the tires and decide what parts of Volcker need to be changed,” said a person who has consulted with the Trump transition team.
A representative of the transition team didn’t respond to a request for comment.
Even under the Obama administration, “we have our doubts about what’s going on behind the scenes,” said Marcus Stanley, policy director for Americans for Financial Reform, a coalition of progressive groups that supports the rule and has pushed regulators to disclose more about how they enforce it. “If you appoint people who don’t believe in the Volcker rule, it would be pretty easy for them to turn it into a kind of rubber stamp.”
There is already evidence that the election result is affecting the debate around the Volcker rule. Some supporters of the rule in Washington, including within the Treasury Department, have questioned whether Goldman Sachs Group Inc.’s recent $100 million-plus profit on a distressed debt trade complied with the trading ban, according to people familiar with the matter. Now there is little time before Mr. Trump’s inauguration to probe the issue, and it is not clear whether Mr. Trump’s Treasury Department appointees would make it a priority.
A Goldman spokesman didn’t respond to a request for comment. The bank previously said the firm is focused on meeting the needs of its clients.
Big banks’ Washington trade groups initially lobbied against the rule, arguing in part that it would be difficult to enforce. J.P. Morgan Chief Executive James Dimon once quipped that in order to enforce the rule, regulators would need a lawyer and a psychiatrist assessing every trader’s intent.
Banks have since given up trying to change the law and instead focused on trying to shape the rule’s fine print. Earlier this year they successfully pushed regulators for extra time to divest certain investment funds.
It is possible, of course, that Mr. Trump will nominate regulators who favor the Volcker rule, such as Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig. Mr. Trump himself has endorsed a modern version of the Depression-era Glass-Steagall law, which is similar to the Volcker rule in that it is designed to keep traditional banks from engaging in risky trading.
Many big banks have also shed proprietary trading businesses since 2008, which could make it difficult for them to get back into the business. “Once it’s gone into effect, it’s hard to turn back the clock,” said Oliver Ireland, partner at Morrison & Foerster LLP.