Blame Congress for Volcker Delay

NEW YORK ( TheStreet) -- Bank regulators have done a bang-up job in making sure that the nation's largest financial institutions build up sufficient capital levels to weather another economic storm, but the Federal Reserve's proposal to implement the "Volcker Rule" still hasn't been finalized.

Last May, I wrote an opinion piece called Volcker Rule: Now or Never, saying it was time for Congress to hold a hearing to discuss exactly what legislators meant when banning proprietary trading by the nation's largest banks, because the Federal Reserve was obviously having difficulty implementing the rule. Almost a year later, Congress hasn't held a hearing on Volcker and the Federal Reserve still hasn't finalized its rules.

The Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama in July 2010 -- included the Volcker Rule, a provision supported by senators Carl Levin (D., Mich.) and Jeff Merkley (D., Ore.). The Federal Reserve in October 2011 released its draft proposal for rules to implement the Volcker Rule, which caused plenty of confusion, with the Fed soliciting industry and public comment on over 300 questions. The Fed's public comment period over the rule ended in January 2012.

While banning proprietary trading by financial companies enjoying Federal Deposit Insurance Corp. backing for their deposits, the Volcker Rule has exceptions for some hedge trading. The Volcker Rule also has exceptions for market-making activities, allowing banks with brokerage subsidiaries to maintain limited inventories of securities. With neither the hedge-trading exceptions nor the market-making exceptions settled, the Fed last April announced that banks would be required to comply with the Volcker Rule by July 21, 2014.
Paul Volcker, economist, former Fed chairman and proposer of what has become known as the "Volcker Rule"

Even before the announcement last April, the biggest names on Wall Street were already letting go of their buy-side trading staffs. July 2014 seemed pretty far away. It no longer does.

In its bombshell report bashing JPMorgan Chase ( JPM) over its " London Whale" hedge trades costing the company at least $6.2 billion, the Senate Subcommittee on Investigations on Thursday said "federal financial regulators should immediately issue a final rule implementing the Merkley-Levin provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Volcker Rule, to stop high risk proprietary trading activities and the build-up of high risk assets at federally insured banks and their affiliates."

OK, great. Now maybe Sen. Levin, the subcommittee chairman, can do something to help the Federal Reserve. When the uproar over the "London Whale" began last May, after JPMorgan CEO James Dimon first disclosed the hedge-trading problems, Frank Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP, in the firm's Philadelphia office -- said "financial institutions are trying to understand exactly what the regulators think Congress meant," when drafting Dodd-Frank's Volcker Rule, and that "this period of time will allow the regulators, the industry and perhaps Congress to hold hearings to establish congressional intent on this provision."

The Senate subcommittee's report makes it very clear that what Congress wants is for the Federal Reserve immediately to implement a rule the regulator doesn't understand. Looking back, Mayer says "at the end of the day, I still stand by what I said in the May article. Often the markets are ahead of regulators and Congress. Investors will want to know if they are investing in an institution that has proper enterprise risk management in place."

Mayer calls the Senate subcommittee's report on JPMorgan's trading debacle "an example of potentially the larger policy debate on whether a financial company is too large to regulate, whether a financial company is too large to manage its risk and whether the shareholders -- in kind of a proxy environment -- can insist upon a vote on whether the institution is too big."

According to Mayer, "it is necessary for Congress to fully vet the policy issues, so the system can work as fully as possible, and then create the legal environment to enable the efficiency of the financial system."

The only way forward to finally implement the Volcker Rule and to fully address the ongoing "too-big-to-fail" debates that are threatening the U.S. financial system, is for Congress to come up with a way to include all stakeholders, including the banks, the regulators and private and institutional shareholders, in the discussion.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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