AFR Statement: Proposal to Overhaul Volcker Rule Would Unravel Key Response to Financial Crisis


May 30, 2018

Carter Dougherty, 251-6700


AFR Statement on Proposed Overhaul of Volcker Rule

“This proposal is no minor set of technical tweaks to the Volcker Rule, but an attempt to unravel fundamental elements of the response to the 2008 financial crisis, when banks financed their gambling with taxpayer-insured deposits,” said Marcus Stanley, policy director at Americans for Financial Reform. “If implemented, these proposals could turn the Volcker Rule into a dead letter, a regulation that would not meaningfully restrict trading activities at the banks whose problems could drag down the entire financial system — again.”

“The current Volcker Rule regulation already contains numerous exemptions and other unnecessary complexities that accommodate Wall Street banks,” Stanley said. “This proposal threatens to further undermine critical elements of the rule ranging from its scope of its application to the level of permitted proprietary trading.”

“Just ten years after the financial crisis, Congress and the federal regulators have once again become Wall Street’s enthusiastic partners in de-regulation, putting the rest of us at risk for the sake of still greater industry profits,” said Lisa Donner, executive director of Americans for Financial Reform. “At a time when these big banks are already flush with money, including from massive tax cuts, it is hard to fathom why it would be in the public interest to unleash more ‘heads they win, tails we lose’ speculation.”

Today’s proposal opens the door to changes that would:

–  Expand how much banks can trade with depositors’ money. The current regulation implementing the Volcker Rule does not completely ban this practice; it limits it. This proposal suggests dramatically stretching those limits, calling into question whether the rule would effectively constrain dangerous bank activities.

– Narrow the definition of “trading account” so important elements of bank activities would not be subject to the Volcker Rule at all

– Give banks unjustified wiggle room on the crucial requirement of aligning trading with “reasonably expected near term customer demand”, which is the key tangible limit on their trading activities. This move would cut the link between trading activity and customer needs.

– Loosen the definition of hedging so that banks could claim that potentially risky trades are actually intended to reduce risk, without documenting the specific risks they are supposed to reduce. This would increase the chances of losses like the ones at JPMorgan Chase (the “London Whale”) where alleged hedging became multi-billion dollar losses.

– Add still more exemptions to the Volcker ban on bank ownership of external funds, beyond the 14 regulator-created exemptions already in the rule. This change would once again allow banks to own the full range of complex securitized products that lay at the heart of the financial crisis.