A flagship provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was the implementation of the Volker Rule, a provision making it illegal for FDIC insured banks to trade for their own accounts—a practice commonly known as proprietary trading. Strongly opposed by those on Wall Street, this rule has since served as a tremendously effective firewall between bank interests and those of their clients. No longer would clients face the possibility of front running, no longer would they question whether a pitch is a worthy investment or simply the bank trying to dump poorly performing assets.
The truth is, the Volker rule corrected many industry wide disconnects that, for many years, allowed banks to profit at the detriment of their clients. But unfortunately, Congress, via the Economic Growth, Regulatory Relief, and Consumer Protection Act, has limited the scope of the Volker Rule and it seems the Federal Reserve wants to do more of the same. In a proposal submitted for signature to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission, the Fed takes a highly conservative view that bank regulation has become excessively burdensome—advocating for more "self-regulation" in areas currently under purview of the aforementioned agencies.
Specifically, the Fed wishes to amend the Volker Rule to:
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 firms with the most trading activity;
Provide more clarity by revising the definition of "trading account" in the rule, in part by relying on commonly used accounting definitions;
Clarify that firms that trade within appropriately developed internal risk limits 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 Volcker rule on the foreign activity of foreign banks; and simplify the trading activity information that banking entities are required to provide to the agencies.
While these goals seem sensible to some, to those who closely follow the Trump administration, this proposal is just another in a long line of partisan attacks by an administration that measures political victories by how many Obama-era laws it repeals. Unfortunately for the administration, repealing Dodd-Frank takes an act of Congress, and even with a republican majority, that seems unlikely. So as an alternative strategy, the administration is pressuring the Fed (in conjunction with other agencies) to chip away at Dodd-Frank's major provisions by establishing new rules which circumvent previously implemented rules.
Now, in full disclosure, I must say I am not blind to the financial and operational hurdles banks face when complying with Dodd-Frank. I worked in the industry shortly after the law was implemented and witnessed some of its more, shall I say, irritating elements. But as a policy analyst, I am inclined to look at a policy's big picture—when big banks use proprietary trading to go against the best interests of their clients and nearly take down the American economy in the process, something has to change.
Dodd-Frank was that change. It drastically changed how we approach financial regulation and how we view the banking industry's economic impact. And while bank executives don't like to admit it, Dodd-Frank has been pretty good for banks. The economy has been growing at a steady rate since the crisis, profits are at all-time highs, and clients no longer feel they are the target of institutional traders. So it's unfortunate the Fed is bowing to the Trump administration's shortsighted partisan agenda, but I am hopeful that other regulatory agencies will see this proposal for what it is and vote against these changes. But if they don't, they better be prepared for what can happen when banks are left to their own devices.