The Long, Long, Long Road To New Rules For Banks

May 18, 2012
Originally published on May 18, 2012 3:49 pm

Would that big, bad JPMorgan Chase trade have violated the Volcker Rule?

It's too soon to say, despite the fact that the rule is part of a two-year-old law.

The Volcker Rule bans deposit-taking banks from making speculative bets. But it allows banks to make investments to hedge risks.

Whether the JPMorgan trade counts as a hedge gone horribly wrong (and therefore kosher under Volcker), or as a speculative bet (and therefore prohibited) depends in part on the details of how the rule is written.

And those details have yet to be finalized.

The rule was included in the Dodd-Frank act, the big financial-reform bill that Congress passed in 2010. It was a few pages long in the statute.

The proposed details of how the rule will be implemented run to hundreds of pages. Five different regulatory agencies are collaborating. And the banks are weighing in with their own, extensive comments.

This long, slow implementation isn't unusual at all. It's entirely typical. Dodd-Frank called for hundreds of new rules; only 27 percent of those have been finalized, according to this recent report (PDF).

The details of the Volcker Rule are likely to be finalized later this year. But the regulators recently said banks will have until 2014 to comply fully with the final rule — four years after Dodd-Frank was passed, and six years after the financial crisis.

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Next, let's try to explain a financial rule we've constantly mentioned on the air lately, but that not all of us understand. In fact, even federal regulators do not yet seem to fully agree on the meaning of the Volcker Rule, but it's been suggested that if that rule had been in place, it might've been harder for JP Morgan Chase to lose more than $2 billion with a single trading strategy, something that's been revealed in recent days.

Jacob Goldstein of NPR's Planet Money team joined us from New York to talk about it. Hi, Jacob.


INSKEEP: Would you remind us what the Volcker Rule is or is supposed to be?

GOLDSTEIN: Well, sure. So, it's named for Paul Volcker. He's a former chairman of the Federal Reserve. And after the financial crisis, Paul Volcker was going around, pushing what sounds like a pretty simple idea: that is, banks that take deposits from ordinary people, banks whose deposits are insured by the federal government, they should not be allowed to make speculative bets in the market.

And the jargon for this is that you've probably heard is: Banks should not be allowed to engage in proprietary trading.

INSKEEP: Just to be clear on this, if I put my money in the bank, in a savings account, the bank is going to send it back out the door in an investment. But the idea here is that it should be a nice, reasonably safe loan to somebody. It shouldn't be the Wall Street equivalent of a casino bet.

GOLDSTEIN: Yeah. That's a great explanation of sort of the simple version of the idea. And the Volcker Rule, it was passed as part of that big Dodd-Frank act a few years ago, the big finance overhaul. But like a lot of other things in Dodd-Frank, over time, the Volcker Rule has gotten a lot more complicated.

There's one wrinkle in particular that's really important in the context of the whole JP Morgan thing, and that is there's part of the rule that says banks are allowed to hedge their risks. And this is where it gets really gray. Banks may be allowed to hedge risks against their entire portfolio.

So it's not just that they can hedge specific loans or even specific bundles of loans. They can try to hedge, basically, against their entire business. And JP Morgan, it's a huge, global bank. You know, so JP Morgan's entire business, that includes this huge swath of the world economy.

So you could imagine JP Morgan being able to argue that almost any trade is actually a hedge against something or other, against its whole business.

INSKEEP: So - based on what we know, anyway - would this trade that has cost JP Morgan more than, it seems, $2 billion actually have violated the Volcker Rule?

GOLDSTEIN: Well, let's start with what JP Moran says. They say, not surprisingly, this trade was a hedge. They say it was badly executed. They say it was sloppy. They even say it violated the bank's own principles of risk, but they say it was a hedge, which suggests - you know, according to them, anyways - it would not have violated the rule.

INSKEEP: OK, they say that. What do the federal regulators say?

GOLDSTEIN: Well, so we heard this week from the SEC that they're looking into it. But, you know, the real bottom-line question here, yes or no, would this have violated the rule, we have not heard an answer to that yet. And a big part of the reason we haven't heard an answer to that yet is this rule actually doesn't exist yet in final form.

The original law, Dodd-Frank, it really just had a rough outline for the Volcker Rule. The regulators are supposed to fill in the details, and they're still working on that.

INSKEEP: I wonder if the problem here gets back to the beginning. In the end, a bank is going to take my money and risk it somewhere, and they are just pushing and pushing and demanding the fullest freedom to risk it in the way that they want to do, the way that they think is best.

GOLDSTEIN: That's certainly true. The banks have been pushing back on not just the Volcker Rule, but on a lot of elements of Dodd-Frank. I do think, though, it's worth pointing out just how long this is taking. You know, it's been almost two years since Dodd-Frank was passed. It's been four years since the financial crisis. And this long implementation, this is not unique to the Volcker Rule. This is, in fact, typical of Dodd-Frank. Most of the rules in this bill, they are still not in place, and it's really taking a long time.

INSKEEP: Upside, at least, Jacob, you've got several more years of employment trying to explain all of this to us.

GOLDSTEIN: The more complicated it gets, the better it is for me.

INSKEEP: Jacob Goldstein of NPR's Planet Money team. Transcript provided by NPR, Copyright NPR.