What is Volcker rule? Why US banks need 5 more years?


Wall Street institutions are requesting the U.S. Federal Reserve to prolong the deadline for becoming compliant with the Volcker rule. What is Volcker rule and why is it important?

15 August, AtoZForex – The Wall Street banks have asked the Fed to postpone the deadline by five more years. Based on the argument that they require additional time to exit the certain investments that are “illiquid” and are no longer allowed by law. But what is Volcker rule anyway? Volcker rule is a part of the Dodd-Frank financial reform law and is aimed to prevent banks from utilizing their own capital for speculative investments. It was named after Paul Volcker, the Federal Reserve Chairman, and introduced in 2014.

In more detail, the reform specifies that banks are not allowed to carry out certain investments, such as short-term proprietary trading of securities, derivatives, commodity futures and options, from their own account and have to restrict their relationship with private equity funds and hedge funds. Yet, how effective is the Volcker rule? Since the reform came into force, the Fed already had to issue three times a one-year extension to prolong the compliance deadline. Now, the Wall Street banks trigger the clause in the Volcker rule that allows them to request an extra grace period of five years if they still possess over “illiquid” funds, which were part of contractual commitments.

Which U.S. banks need the extension?

Those wall-street banks asking for the extension of Volcker rule are JPMorgan, Goldman Sachs, and Morgan Stanley. They are pushing it through the lobbying group Securities Industry and Financial Markets Association (SIFMA). According to the comments of the association:

“SIFMA is working with our members to ensure that regulators have the data they need to adequately appraise the situation. Congress intended to provide “an appropriate transition period” so that banks could exit illiquid funds without disrupting markets.”

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Since mid-2013 banks managed to substantially reduce their exposure to non-compliant investments with Goldman Sachs lowering them almost by half. However, banks reported that they might not be able to fully eliminate risky investments before the deadline on July 2017. Therefore, they will need extra time.

A tough decision for the Fed

If the Fed approves the request, then the banks will have time until 2022 to exit these “illiquid” investments properly and avoid possible lawsuits that could appear if the contractual investments are disposed to quickly or wrongly. Yet, if the Fed will approve the decision, they will face criticism for providing Wall Street banks with extra room to handle their cases.

In response to the request of the Wall Street banks, the Fed has made enquiries about the banks’ investments, to see if these investments fall under the conditions of being illiquid. Moreover, the Fed will assess how much time it would take to withdraw them and what actions the banks already have taken to remedy the case.

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