Volcker Rule to leave silent majority banks untouched
There are 7,181 federally insured banks in the United States. After a new rule is implemented to stop banks from making risky trades, the business activities of 7,175 of these banks will remain essentially unchanged.
The Volcker Rule, among the most controversial aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, will prohibit federally insured banks from engaging in proprietary trading, aka “casino gambling,” which involves speculation through short-term trades in stocks, derivatives and other securities.
The financial crash, borne of these risky Wall Street banking practices, cost the economy about $12 trillion, give or take. In an attempt to ensure Main Street not be put on the hook for more of Wall Street’s risky business, Congress called for regulation of proprietary trading, aka the Volcker Rule, informally named after former Federal Reserve Chairman Paul Volcker. But Wall Street lobbyists have succeeded in elevating concerns over the relatively minuscule costs of implementing the Volcker Rule to a paramount position in the debate over how regulations should be crafted to implement it.
The Volcker Rule will prohibit federally insured banks from engaging in proprietary trading or owning hedge funds of more than de minimis size. The rule prevents a fraction of 1 percent of banks from putting our financial system—and, ultimately, our economy—at risk. In principle, the Volcker Rule aims to protect banking’s core function of aggregating savings so that savings can be loaned to consumers, homebuyers and businesses. Federal deposit insurance protects the savers, which encourages them to accept lower returns (in this case, in the form of interest rates) than they would expect for higher-risk investments. Banks, in turn, are expected to pass on savings from their reduced cost of capital to their borrowers. The benefits that accrue from reduced costs of capital justify expectations that the banks abstain from high-risk activities.
Opponents and proponents alike commonly observe that this provision promises the greatest change in American banking since the enactment in 1933 of the Glass-Steagall Act, which separated commercial from investment banking.
In reality, the Volcker Rule will mean no change, no closure of business divisions, no costs from foregone financial activity, for more than 99.9 percent of banks.
The nation’s banking regulators – including the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Commodity Futures Trading Commission, and the Securities and Exchange Commission – are finalizing the Volcker Rule (long after the July 21, 2012, deadline for completion imposed by Congress in Dodd-Frank). While the regulators undoubtedly understand the impact of the financial crisis, they will inevitably consider the effects on the industry they regulate. These regulators have conducted 4,000 meetings with outsiders, the overwhelming majority of which represent the interests of Wall Street. It’s critical that regulators understand that the banking industry will thrive with a robust Volcker Rule.
It is important to point out that, just four banks account for 93 percent of total derivatives holdings and a grand total of just six banks account for 88 percent of all proprietary trading affected by the Volcker Rule. “Proprietary trading in any real volume is confined to a very few large, sophisticated U.S. banks,” Volcker wrote in a letter to federal regulators. The nation’s 6,888 credit unions are legally barred from using derivatives. In other words, of the 14,069 banks, credit unions and savings and loans that the average consumer may consider a “bank,” the Volcker Rule means business as usual for 14,063 of them.
While large bank lobbyists and others who profit from bank proprietary trading vocally oppose the Volcker Rule, Washington representatives of the vast majority of American banks endorse this reform. The Independent Community Bankers of America (ICBA) boasts 5,000 members among the nation’s 7,181 banks. While Wall Street lobbyists declare grave harms from the Volcker Rule, here’s what this trade association concludes: “ICBA generally supports the Volcker Rule which is an important step toward protecting the business of banking from the speculation inherent in proprietary trading and sponsoring or investing in hedge funds.” The trade association for the lion’s share of this industry explains: “The recent financial crisis and the ensuing government bailout show what happens when banks depart from the fundamental business of banking.”
The thousands of bankers unaffected by the Volcker Rule may not travel frequently to Washington, D.C., to defend it. Who petitions City Hall about a stop light on a street where one doesn’t drive? But as Washington’s financial agency rulemakers finalize this important safeguard, they should be especially attuned to the silence of 7,000 banks and of Public Citizen’s most recent financial report, which examines how the Volcker Rule would impact three different sizes of banks and concludes even Wells Fargo should emerge relatively unscathed.
Bartlett Naylor is Public Citizen’s financial policy reform advocate. You can follow him at @BartNaylor.