Volcker rule

Résumé du document

How would market participants respond? Can they avoid compliance to the new regulation? Could there be unintended consequences? Can regulators abuse the measure?

Extraits

[...] Guynn, Davis Polk & Wardwell LLP Harvard Law School Forum On Corporate Finance and Financial Regulation (hyperlink) Regulators Finalize the Volcker Rule Regulators - United States Department of Treasury (hyperlink) The Black Swan: The Impact of the Highly Improbable - Nassim Nicholas Taleb 2007 Random House (book review hyperlink) The Giant in Dodd-Frank – The Financial Services Roundtable (hyperlink) FSR is the main lobbying group for the largest banking institutions in the US: they claim to represent $92.7 trillion in assets under management and revenues of $1.2 trillion The Volcker Rule:A Deeper Look into the Prohibition on Sponsoring or Investing in Covered Funds – KPMG (hyperlink) Restricted Investment in Private Equity: The Volcker Rule's Incursion Into Banking? Manasa Reddy Gummi LL.M. [...]

[...] Recent literature[7] on the Volcker rule points out that the law is vague and too broad in its language. As such, it gives discretionary powers to regulatory agencies to set guidelines that may significantly hinder US banks' ability to service their clients, and retain their competitive edge against their international competitors. The rule also hampers financial institutions' ability to lend on money markets. Credit funds and private equity funds are significant partners with strong demand for liquidity, and help banking institutions diversify their risks. [...]

[...] Regulators are prone to issue an increasingly complex set of guidelines and regulations that firms find unclear and/or costly to implement. Financial institutions can still avoid compliance with the rules issued by their overseeing agency, either by asking for exemptions or clarifying guidelines for specific products. They also avoid immediate compliance as regulatory agencies keep postponing implementation of the Volcker rule farther in the future. Finally, the rule is likely to have an adverse impact on global liquidity, since it constrains US firms in their client portfolio. [...]

[...] Lobbying groups were closely involved in the law-writing process, and the 2010 act reflects their input with the number of exemptions and provisions for banking firms of a specific size. Nevertheless, market participants felt the rule was too cumbersome and costly to abide by. An initial inventory[6] suggests that the range of existing funds is too broad and too complex to determine with certainty which funds are allowed to be traded in, and which fall under exemptions provided by the Dodd-Frank legislation. Despite extensions granted by the regulatory bodies overseeing the banking sector, financial institutions have expressed their concern that the Volcker rule requires costly reviews of their holdings. [...]

[...] Furthermore, the Volcker rule also prohibit banking institutions from owning as a subsidiary, or investing in a hedge fund or a private equity fund. This prohibition is rooted in the same argument, that is, a hedge fund is prone to take risks that are comparatively excessive for a conventional bank with deposit-holders and institutional shareholders. The rule also limits the liabilities that large, systemic banks can hold. The rationale of this constraint is slightly different, and has to do with the inherent instability of the banking system when there is no lender of last resort: when a systemic bank takes on too much liability, it exposes itself to the catastrophic repercussions of a Black Swan event[4], a highly unlikely event such as a nationwide real estate market crash, as was the case in 2007-2008. [...]