WASHINGTON — Federal Reserve Governor Daniel Tarullo said Thursday the Volcker Rule, which has encountered significant delays in taking effect, is “on track for implementation by the end of this year.”
Testifying alongside Tarullo at the Senate Banking Committee, Mary J. Miller said the Treasury Department intends to “direct significant attention and resources during the remainder of the year” to add to regulatory agencies’ efforts to complete the Volcker Rule.
“Finalizing the regulations will continue to be a top priority for the Secretary and the Treasury Department,” said Miller, the Under Secretary for Domestic Finance. “Successful completion of this work will impose needed limits on banks’ ability to engage in speculative trading activities.”
That means, with the Volcker Rule in place, banks will only be able to act as intermediaries in trades for customers and will no longer be allowed to perform speculative trades for profit. Banks will also be banned from investing in firms that conduct proprietary trading extensively, such as hedge funds and private equity firms.
With speculative trading, especially that of derivative securities, often cited as a major culprit in bringing about the global financial crisis, the Volcker Rule was enacted into law by Congress in 2010 as part of the sweeping Dodd-Frank reforms. In the aftermath of a near financial meltdown, the rule was seen as an essential step in creating a more stable financial system.
It was named after former Federal Reserve Chairman Paul Volcker, who has argued that allowing banks to engage in speculation created an unacceptable level of risk that threatened the proper functioning of the financial system.
However, even though the Volcker Rule has already been written into law, differences among regulatory agency officials and aggressive lobbying by banks threw the rule-making process for timely implementation of the Volcker Rule off-schedule. It was supposed to have been in place by July 2012.
In a letter to regulatory agencies, the International Institute of Finance, a global association of financial institutions, criticized the Volcker Rule as “threatening to hinder, rather than advance, the stated purpose of improving financial stability.”
“It would not only result in an across-the-board decrease in liquidity and increase in price volatility in many markets in the U.S., but also have negative effects on markets globally, as banks will be forced to reduce the volume and quality of their market-making services,” the letter read.
In addition, the rule has met strong opposition on Capitol Hill from many members of the Republican Party.
Rep. Spencer Bachus, one of the Volcker Rule’s staunchest opponents, said at a House Financial Services Hearing Committee hearing last year, “the rule doesn’t make the financial system any safer, but it does impose significant costs on consumers, workers, savers, taxpayers and businesses.“
“It is a self-inflicted wound that should be repealed,” the Alabama Republican added.
In his testimony at Thursday’s hearing, the Fed’s Tarullo acknowledged the long delay in getting the Volcker Rule in motion.
“The implementation of the Volcker Rule has taken a significant amount of time for a variety of reasons – the interpretive and policy issues implicated by the rule are complex, the completion of the rule requires negotiations among a variety of banking and market regulators, and the potential cost of getting it wrong are high,” he explained.
Tarullo added, “But the agencies need to provide firms, markets, and the public with the product of all this work, so that they can begin to adjust their plans and expectations accordingly.”