UPDATED: Volcker rule changes approved on split vote by FDIC Board, with wide disparity of views on impact for banking system

Changes to the “Volcker rule” – called by some long overdue, but by one regulator a total evisceration of measures to prevent risky activities at banks – were approved Tuesday on yet another split vote by the board of the federal insurer of bank deposits.

In a 3-1 vote, the Federal Deposit Insurance Corp. (FDIC) Board approved a final rule that reduces the number of banks and bank holding companies subject to the Volcker rule – which generally prohibits proprietary trading by banks with more than $10 billion in consolidated assets – as well as the number of securities traded by banks and financial institutions.

According to the American Bankers Association (ABA), banks with limited trading assets and liabilities of less than $1 billion will have a rebuttable presumption of compliance with the Volcker Rule. Once approved by the Federal Reserve, Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the changes will take effect on Jan. 1, 2020, with mandatory compliance not required until Jan. 1, 2021.

All three members of the FDIC Board appointed by President Donald Trump voted in favor of the final rule (who are FDIC Chairman Jelena McWilliams, Comptroller of the Currency Joseph Otting and Consumer Financial Protection Bureau (CFPB) Director Kathleen [“Kathy”] Kraninger).

Otting, in addition, noted that just that morning he signed a final rule for national banks from the OCC that is essentially the same as that approved by the FDIC Board.

FDIC Board Member Martin Gruenberg points to element on chart that he says illustrates negative impact of final rule’s changes to Volcker rule during Aug. 20 board meeting.

McWilliams, reading from a statement, said the final rule “will provide more clarity, certainty, and objectivity around the Volcker Rule, while tailoring the requirements to focus on those banks that conduct the overwhelming majority of trades.”

However, FDIC Board Member (and former chairman) Martin Gruenberg – the only member of the board appointed by President Barack Obama – voted against the final rule. He said, in a statement, that the final rule means the “Volcker Rule will no longer impose a meaningful constraint on speculative proprietary trading by banks and bank holding companies benefiting from the public safety-net.”

House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) characterized Tuesday’s action by the FDIC and OCC as “senseless” and urged those two regulators and others to reconsider.

“I am deeply concerned by today’s FDIC and OCC actions, and potential additional votes by other regulators, to weaken this critically important rule,” Waters said in a statement. “Doing so will not only put the U.S. economy at risk of another devastating financial crisis, but it could potentially leave taxpayers at risk of having to once again foot the bill for unnecessary and burdensome bank bailouts.” She noted particularly her concern that the changes remove prohibitions in a way that Congress “never intended,” leaving “Wall Street megabanks to gamble with the same types of risky loan securitizations that turned toxic in 2008, at a time when these risky products are once again on the rise.”

According to the FDIC, the final rule would:

  • Tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities, with the most stringent requirements applied to banking entities with the most trading activity;
  • Retain the short-term intent prong of the “trading account” definition from the 2013 rule only for banking entities that are not, and do not elect to become, subject to the market risk capital rule prong;
  • Replace the rebuttable presumption that instruments held for fewer than 60 days are covered under the short-term intent prong with a rebuttable presumption that instruments held for 60 days or longer are not covered;
  • Clarify that banking entities that trade within internal risk limits set under the conditions in this final rule are engaged in permissible market making or underwriting activity;
  • Streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
  • Limit the impact of the rule on the foreign activities of foreign banking organizations; and
  • Simplify the trading activity information that banking entities are required to provide to the agencies.

Another proposed rule is planned on “additional, specific changes to the restrictions on covered fund investments and activities and other issues related to the treatment of investment funds,” the final rule notice states.

Tuesday’s final rule has an effective date of Jan. 1 and a compliance date a year later (Jan. 1, 2021). Banks would have the option to voluntarily comply with the amendments of this final rule prior to the compliance date.

FDIC Approves Interagency Final Rule to Simplify and Tailor the “Volcker Rule”

Waters’ statement

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