Dec. 13, 2012

Report: Volcker Rule Ban on Proprietary Trading Will Mean No Significant Change for Vast Majority of American Banks

Public Citizen Study of Three Banks of Varying Sizes Rebuts Industry Lobbyist Claims That Volcker Rule Carries Burdensome Implementation Costs

Note: The House Committee on Financial Services held a hearing today, “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation, Part II.”

WASHINGTON, D.C. – Less than one-tenth of 1 percent of the nation’s 7,181 banks will experience any substantial change in their business activities after the Volcker rule’s prohibition on risky trading is finalized, according to a Public Citizen report released today.

The report, “Business as Usual,” demonstrates through the prism of a community bank, a midsized bank and a megabank that the vast majority of federally insured financial institutions either would not be significantly affected by a proprietary trading ban because they barely engage in such activities, or, in the case of the megabank, do not rely substantially on them.

Proprietary trading refers to short-term transactions in which a bank gains or loses. It includes risky trading mechanisms such as hedge funds. Washington’s financial regulatory agencies are finalizing the Volcker rule, which bans proprietary trading and was mandated by the Dodd-Frank Wall Street Reform Act of 2010.

“Wall Street lobbyists have infected the policy debate over the Volcker rule with speculative fears that the rule will impose high costs,” said report author Bartlett Naylor, financial policy advocate for Public Citizen’s Congress Watch division. “This report should disabuse regulators of any notion that such fears are based on reality.”

The report examines Generations Bank, a real version of the bank depicted in the classic Christmas film “It’s a Wonderful Life.” Boasting increasing profits from traditional loan-making, Generations shuns speculative trading. “It’s just not the way we operate,” the bank’s CEO told Public Citizen.

Regional bank M&T also thrives without so-called proprietary trading. The bank’s 2011 annual report contained the following: “Banks have traditionally played a clear, if limited, role in the economy: to gather savings and to finance industry and commerce. Trading and speculation were nowhere included—nor should they be.”

Even giant Wells Fargo, one of the nation’s four megabanks, will emerge relatively unscathed from the ban on proprietary trading. The company’s CEO John Stumpf said in a 2012 TV appearance that the impact would be “almost zero for us.” Wells Fargo, which is among the 0.01 percent of those affected, may be forced to divest its merchant and venture capital funds.

A leading Wells Fargo shareholder also welcomes the Volcker Rule. The largest shareholder of both M&T and Wells Fargo is Berkshire Hathaway. Berkshire Hathaway Vice Chairman Charles Munger stated in a video interview that proprietary trading “by the computer geniuses … [has] all the social utility of a bunch of rats admitted to a granary.”.

The report is available at https://www.citizen.org/banks-unaffected-by-volcker-rule-financial-reform-report.