July 12, 2017

Breakingviews: Volcker Rule Emblematic of New Fed Pick’s Challenge

by Breakingviews

The Volcker Rule is emblematic of the latest Federal Reserve nominee’s challenge. Former Treasury Department official Randal Quarles is set to be the central bank’s first vice chair of supervision, a key role in President Donald Trump’s deregulatory push. But even where political consensus exists, like revising parts of the proprietary-trading ban, change requires support from fellow watchdogs.

The Volcker Rule, part of the 2010 Dodd-Frank legislation, was hailed by supporters as a way to reduce risks at banks with federally guaranteed deposits by limiting their ability to trade with their own funds. It was slated to go into effect in 2012, but differences among the five regulatory agencies involved in drafting the measure held it up. It took pressure from then-Treasury Secretary Jack Lew to get the quintet to finally approve the rule in 2013. Most of it went into effect in 2015.Since then, there’s been growing agreement that the rule is too complicated. In his last speech as Fed governor in April, Wall Street critic Daniel Tarullo said ensuring compliance took up too many resources among both the agencies and the banks. For example, the rule requires firms and regulators to determine the intent of bankers in assessing whether their trades were for legitimate market-making activities, which may be harmed by the measure.Quarles, who was nominated by Trump on Monday, will play a leading role in revising the rule. Lew’s successor, Steven Mnuchin, has already directed the agencies to start reviewing the measure. A recent Treasury report suggested several amendments, including excluding venture capital and other investments that promote growth from covered funds that need to be divested. Another proposed change is to impose enhanced compliance on a smaller group of banks that have at least $10 billion in trading assets.

The five agencies, though, have yet to agree on the details. Furthermore, approval requires votes by members of the boards or commissions of most of the watchdogs. That means the involvement of about 20 principals when they are at full capacity. That will slow the process. With other regulatory issues like mortgage financing requiring regulators to jump through similar hoops, Quarles may have to hone his diplomatic as well as supervisory skills.

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