Almost four months after the deadline passed on finalizing the Volcker rule, the firewall on most types of proprietary trading set up between investment and commercial banks, the regulators tasked with writing the rule are no closer to a resolution. The Treasury Department last promised that the rule would get written by the end of the year, which is still a couple months away. But there hasn’t been a whole lot of movement, at least publicly, in some time.
Now the authors of the Volcker rule, Jeff Merkley and Carl Levin, have gone public. In a letter to the regulators responsible, Merkley and Levin hint that differences at the staff level have stopped progress on the rule writing, particularly differences between those who want to remove loopholes that crept into the draft proposal and those who want to preserve them. This is obviously based on inside sources – my guess is that regulators friendly to the Volcker rule effort are telling Merkley and Levin about the hurdles.
The letter when to Fed Chairman Ben Bernanke, the FDIC’s Martin Gruenberg, OCC’s Thomas Curry, the SEC’s Mary Schapiro and CFTC’s Gary Gensler. In general terms, they hold responsibility over the Volcker rule, though the Treasury Department has the ability to weigh in as well – and certainly they have done so.
Here’s the important part of this letter:
As with any rulemaking, different agencies may have their own perspectives on various provisions. While we are cautiously pleased to see reports that a consensus is emerging, we are concerned that some ongoing staff-level differences may be obstructing progress. The time for resolving those differences is long overdue. We urge you to move quickly, make the final adjustments needed to simplify and strengthen the October 2011 proposal, and bring the process to a conclusion. The final regulations needed to implement the ban on high-risk trading and conflicts of interest should be issued without delay and no later than the end of the year, so that our financial institutions can speed the process of eliminating the risks and conflicts of interest that continue to endanger the U.S. financial system.
Merkley and Levin note that the delay threatens more situations of high-profile trading losses at depository institutions, a clear reference to the Fail Whale trades at JPMorgan Chase.
The duo even point out that one agency could take the lead on implementing the rule without the others. I’d argue this is a clear reference to the FDIC, which supports a stronger rule relative to the OCC, the bank-friendly regulator. Individual regulators could implement the rules in a parallel process, Merkley and Levin write, saying that “the statute was constructed with that possibility in mind.” They add that a majority of regulators acting would put pressure on the other agencies to follow suit. So they’re effectively endorsing a squeeze on the holdout regulators who are making waves at the staff level.
Sometimes this Kremlinology gets a bit wearying, but I’m fairly confident that this is a barely concealed warning alarm against those seeking to torpedo the Volcker rule, probably inhabitants of the OCC.
UPDATE: Apparently at least one of the staff-level rifts concerns the SEC:
The SEC and a trio of banking regulators are butting heads over how to define the buying and selling of securities on behalf of clients, known as market-making, as well as over banks’ ability to invest in outside investment vehicles such as hedge funds, according to officials close to the discussions. Since brokers, which are overseen by the SEC, conduct market-making activities, the SEC is pushing for more influence over the issue, these people said […]
The SEC faces an uphill battle in getting its way since the three banking agencies are already on the same page. Federal Reserve Governor Daniel Tarullo, acting Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Comptroller of the Currency Thomas Curry broadly agree on the contours of a final version of the Volcker rule, according to officials, including on how to differentiate between permitted market-making activities and banned proprietary trading.
Interesting that the SEC is the odd man out here, though it appears to be more of a turf war than anything else.