Volcker Rule proposal eases restrictions on community banks, per EGRRCPA; Gruenberg takes cautionary view

A proposel to ease Volcker Rule restrictions on community banks’ proprietary trading consistent with this year’s financial regulatory relief law was issued Tuesday by the Federal Deposit Insurance Corp. (FDIC) Board, but not before one of its members struck a cautionary note on how he viewed the limitations of the statutory exemption.

The proposed rule, out for a 30-day public comment period that begins upon publication in the Federal Register, would revise the Volcker Rule to conform with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S. 2155). In line with the statutory requirements, the proposal would exclude a community bank from the restrictions of the Volcker Rule if it meets the following conditions:

  • the community bank, and every entity that controls it, must have total consolidated assets equal to or less than $10 billion; and
  • trading assets and liabilities of the community bank, and every entity that controls it, must be equal to or less than 5% of its total consolidated assets.

The proposal was part of the board’s consent agenda Tuesday; all items on that list were disposed of by a single vote. Before the vote, however, Board Director Martin Gruenberg warned that the proposal “could invite significant speculative activity” into community banks and explained his views on what the new law both does and does not do.

“There has been some discussion that the new statute can be read in a way that would allow any bank, regardless of asset size, to be exempt from the Volcker Rule if its trading assets and liabilities are 5% or less of its total consolidated assets,” he said. “If this were true, not only would large regional banks qualify for exemption from the Volcker Rule, but one or more banks that have been designated as global systemically important banks, or G-SIBs, could become exempt with a modest restructuring of their trading portfolios.

“This was not the intent of the new statute as I understand it,” Gruenberg continued. “Indeed, the heading of the provision in the statute is ‘Community Bank Relief.’ I believe it is clear that this statutory exemption, and the proposed implementing regulation that is before the FDIC Board today, apply only to banking organizations with $10 billion or less in total consolidated assets and that the limitation on trading assets and liabilities is an additional limitation placed on this defined group of banking organizations.”

The proposal, also consistent with EGRRCPA, would amend restrictions applicable to the naming of a hedge fund or private equity fund to permit an investment adviser that is a banking entity to share a name with the fund under certain circumstances.

Once all the agencies sign off, the proposal will be issued jointly by the FDIC as well as the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

Tuesday’s meeting was the first FDIC Board meeting for Kathleen (“Kathy”) Kraninger, who is a director by virtue of her position as head of the Bureau of Consumer Financial Protection (BCFP, formerly known as CFPB). Joseph Otting, head of the Office of the Comptroller of the Currency (OCC), participated by telephone.


Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds

Gruenberg statement