The Volcker Rule was introduced in 2010 as one of the key backbones to the Dodd-Frank Act ((The New York Times Editorial Board, Finally, the Volcker Rule, NY Times (Dec. 12, 2013), http://www.nytimes.com/2013/12/13/opinion/finally-the-volcker-rule.html?_r=0.)) The rule was to prohibit banks from engaging in speculative trades and certain investments, a well-known cause to the financial collapse of 2007-2008 (Id.) However, the implementation of the Volcker Rule was recently delayed again until 2017, as the Federal Reserve provided banks with even more time to meet the rule’s demands. ((Douwe Miedema, Fed Expands Scope of Volcker Rule Delay Until 2017, Reuters (Dec. 18, 2014, 3:04 PM), http://www.reuters.com/article/2014/12/18/us-fed-volcker-idUSKBN0JW2GW20141218.)) The additional delay will allow banks to continue to engage in risky hedge and private equity funds. ((Id.)) It’s no surprise that the banks were against the rule from the start, as less risk and “leverage = lower returns = lower stock price = lower bonuses.” ((Big Banks Hate Volcker Rule Because They Need Leverage to Survive, Better Markets (Jan. 14, 2012, 8:12 AM), http://www.bettermarkets.com/blogs/big-banks-hate-volcker-rule-because-they-need-leverage-survive#.VMky9WR4qds.)) Moreover, a study by the Office of the Comptroller of the Currency estimated that the implementation of the Volcker Rule would cost U.S. banks up to $4.3 billion, ((OCC: Volcker Rule Will Cost Banks Up to $4.3 Billion, Moneynews, (Mar. 20, 2014, 5:09 PM), http://www.moneynews.com/StreetTalk/OCC-Volcker-Rule-Banks/2014/03/20/id/560824/.)) and perhaps this is why banks have asserted that they could not sell these instruments by the previous July 2015 deadline. ((Peter Eavis, Fed’s Delay of Parts of Volcker Rule Is Another Victory for Banks, NY Times (Dec. 19, 2014, 6:57 PM), http://dealbook.nytimes.com/2014/12/19/feds-delay-of-parts-of-volcker-rule-is-another-victory-for-banks/.))
Commentators and consumer advocates are unsatisfied with the delay, as it may demonstrate Wall Street’s growing influence over Washington. ((Id.)) Paul Volcker, a former chairman of the Federal Reserve and the rule’s namesake, heavily criticized the delay in an unlikely move, as he has mostly kept quiet about the rule in years past. “It is striking that the world’s leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries however complicated, apparently can’t manage the orderly reorganization of their own activities in more than five years.” ((Id.)) Further criticism came from the president of Better Markets, Dennis Kelleher, stating that “[i]t’s absurd that these banks can’t sell their investments in seven years. They have completely hookwined the regulators into buying their laughable arguments.” ((Id.)) Another possible explanation of the Fed’s decision to delay the Volcker Rule was to prevent administrative backlog. ((Id.)) If not for the delay, the Fed would have potentially received hundreds of application from banks requesting for certain investment vehicles to be exempt. ((Id.))
Defenders of the delay assert that it was necessary as the “final, fleshed-out version of the regulation did not come out until the end of 2013.” ((Id.)) This would have only provided the banks with a year and a half to sell certain instruments and make sure their investments were in compliance with the final rule.
While the reasons for the delay are debatable, its implications are less contentious. For instance, the delay (or extension, depending on how one may view it) will benefit the U.S. municipal bond market, as it will provide more time for trusts to be “unwound and underlying assets [to be] sold more gradually” instead of a possible “sharp price correct in muni[cipal] bonds.” ((Lisa Lambert, Volcker Rule Delay Good for U.S. Municipal Bond Market – Moody’s, Reuters (Jan. 26, 2015, 2:51 PM), http://www.reuters.com/article/2015/01/26/usa-municipals-volcker-idUSL1N0V51NG20150126.)) The delay will also allow investment banks to save billions by holding onto their private equity investments. ((Jesse Hamilton, Goldman Needs Volcker Delay to Avoid Private–Equity Losses, Bloomberg (Dec. 5, 2014, 5:00 AM), http://www.bloomberg.com/news/articles/2014-12-05/goldman-may-dodge-private-equity-losses-with-volcker-reprieve.)) For example, Goldman Sachs and Morgan Stanley have $7 billion and $2.5 billion, respectively, “invested in private equity that it might have to sell at a loss.” ((Id.)) As the Volcker Rule will prohibit banks from using their own capital to invest in private equity, banks are claiming that if the rule isn’t delayed and they’re forced to dump their holdings, they’ll have to sell them at a loss and receive discounted prices. ((Id.)) Luckily for the banks, they’ll be able to hold onto their private equity and hedge funds until 2017, and possibly even until 2022. ((The New York Times Editorial Board, The Fed Fights Half the Battle, NY Times (Dec. 27, 2014), http://www.nytimes.com/2014/12/28/opinion/sunday/the-fed-fights-half-the-battle.html?_r=0.))
Critics also point to the regulators’ failure to implement other provisions of the Dodd-Frank Act. ((The New York Times Editorial Board, Too Big to Regulate, NY Times (Aug. 9, 2014), http://www.nytimes.com/2014/08/10/opinion/sunday/too-big-to-regulate.html.)) The requirement of banks to submit “living wills” was also delayed as 11 banks submitted impractical plans on “how they would dismantle their operations and financial contracts in an orderly way in the event of impending failure” ((Id.)) The Fed and FDIC granted banks another year to submit realistic plans, allowing them to continue business as usual—undercapitalized and overleveraged, another leading cause to the financial crisis. ((Id.))
It’s difficult to accurately ascertain whether the Fed and FDIC are being understanding regulators and encouraging competition amongst banks, or if critics are right and their voices are waning in a room full of Wall Street lobbyists. Either way, financial regulation reform, particularly the Dodd-Frank Act, has a long way to go before it can be heralded a success.