No, regulators did not gut the Volcker Rule

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Within minutes of the Federal Reserve Board releasing its long-awaited proposal to revise the Volcker Rule on Wednesday, the blowback from critics had already started.

“Let’s call it like it is: This is a massive giveaway to the biggest banks,” said Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee. “These are not small, technical changes. These are massive rewrites to make it easier for Wall Street banks to engage in the same types of risky bets that brought down our economy in 2008.”

Merkley wasn’t the only one who saw it as a big change. In its coverage, The New York Times referred to the proposal as a “sweeping plan to soften the Volcker Rule” that would give big banks a “big reprieve” from the Dodd-Frank Act’s ban on proprietary trading.

The liberal consumer advocacy group Allied Progress, meanwhile, said the plan would allow banks “to play casino again.”

It’s difficult to square that portrayal of the proposal with the one offered by federal regulators, including those appointed by former President Obama, that the suggested changes are designed to make the rule easier to comply with, not easier to avoid.

“The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance,” said Fed Chairman Jerome Powell. “Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements.”

So which portrayal is the right one? The available evidence suggests the Volcker proposal is more of a streamlining than a dramatic overhaul.

A significant part of the plan would eliminate what’s called the “60-day rebuttable presumption.” Under current regulations, a trade of 60 days or less was banned unless a bank could prove to regulators it was not intended to be subject to the Volcker Rule.

This proved a hassle for banks, which have long argued that proving a negative was overly difficult and stopped banks from engaging in market-making activities, which are expressly allowed under the Dodd-Frank Act.

The new proposal would scrap the 60-day timeline and use the accounting treatment of the trade as the guide to whether it is permissible. Under the plan, the accounting must prove that such trades aren’t resulting in significant gains or losses.

What this effectively means is it will be easier for banks to make these kinds of short-term market-making trades since they no longer need to prove their good intentions every time.

But let’s be clear: While such a change may make a difference to banks, nothing in this provision or the proposal as a whole allows banks to engage in proprietary trading again, the heart of the Volcker Rule. Instead, it appears to be an effort to create an objective, easier way to comply with the rule.

“This is not the same as repealing the Volcker Rule,” wrote Jaret Seiberg, an analyst with Cowen Washington Research Group, in a note to clients. “Proprietary trading remains illegal, which means these proposed changes will not usher in a return of how banks invested and ran their trading desks before the financial crisis.”

Indeed, the fact that it isn’t a drastic rewrite of the Volcker Rule is evident in who supports it. Fed Gov. Lael Brainard, an appointee of President Obama, who recently voted against a capital proposal issued by the central bank, said Thursday that the Volcker changes made sense.

“I support today’s proposal because it is crafted to implement the core purpose of the Volcker Rule in a more efficient way,” she said.

Federal Deposit Insurance Corp. Chairman Martin Gruenberg, another Obama holdover, is expected to back the plan when it is released by his agency on Thursday.

Finally, there are the words of the namesake of the original proposal, former Fed Chairman Paul Volcker, who effectively gave the changes his stamp of approval as well.

“I welcome the effort to simplify compliance with the Volcker Rule,” Volcker said in a press release. “What is critical is that simplification not undermine the core principle at stake—that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests. I trust the final rule will strongly maintain that position by, as intended, facilitating its practical application.”

There is no reason to presume that Brainard, Gruenberg and Volcker would back this plan if it truly gutted the Volcker Rule or made it significantly easier for big banks to engage in risky trades. While close scrutiny of measures designed to alter or unwind parts of the Dodd-Frank Act is warranted, not every change being debated is a harbinger of the next crisis. Differentiating between the two will be increasingly important as President Trump's bank regulators begin to leave their mark on the industry.

No doubt this issue will continue to be debated over the next few months while regulators take input on the plan. But in the PR war over changes to the rule, it’s regulators who currently have the upper hand.


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