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Busch: Volcker Rule Delayed is an Upside for Banks

The WSJ carries a story today about how banks are fighting the implementation of the Volcker Rule under Dodd-Frank and may now be getting help.

“Senators from both parties are working to give regulators more time to write the rule, potentially easing banks' concerns that their activities will run afoul of the law as a July deadline passes….The Volcker rule, which restricts banks' ability to trade with their own money, is set to take effect July 21, whether or not regulators have a final rule in place, according to the 2010 Dodd-Frank financial overhaul law. Federal Reserve Chairman Ben Bernanke said last month that regulators likely wouldn't have a rule in time.”

Also, Brookings Institute’s Douglass Elliot points out the key problemwith the law:

“The core problem is the Volcker Rule purports to eliminate excessive investment risk at banks without measuring either the level of risk or the capacity of banks to handle it, which would tell us whether the risk was excessive. Instead, the rule focuses on the intent of the investment. This subjective and vague approach means the Volcker Rule will do a poor job of identifying or eliminating excessive investment risk, will be costly even when it correctly identifies risk, and will be even more costly when it discourages risk that is incorrectly treated as if it were excessive.”

“The Volcker Rule will raise the cost of credit to our suffering economy. Securities markets will be harmed by a substantial reduction in the liquidity currently provided by banks. This will force a widening of bid/ask spreads, equivalent to increasing commissions charged to investors, and will also make new issuances of securities more expensive. It will also raise costs and lower revenues for banks, pushing them to charge customers more in other ways.”

“As a result, companies wishing to invest in new plants or R&D or to hire additional workers will face a higher cost of funds. The decreased efficiency of markets will also spur investors to demand higher risk premiums, reducing the value of existing stocks, bonds, and other assets, potentially including housing.”

When Brookings and bi-partisan support is for a delay, then the forces of nature are lining up against regulators on Volcker.

As I’ve been writing, this is all part of the regulatory drift that is occurring over Dodd-Frank due to the politically difficult decisions that need to be made during an election year. If Volcker is delayed or not implemented, then US bank stocks appear to have further upside even though the sector has rallied massively this year.


Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.