Regulators face pressure from both GOP, Dems on implementing ‘Volcker Rule’

Top financial regulators will appear before a House panel Wednesday to discuss how they plan to implement the "Volcker Rule" and defend their work from criticisms that it is overbroad, ill-defined, and maybe even unworkable.

Republicans have been eager to blast Dodd-Frank ever since it became law, but few pieces have received as much ire as the Volcker Rule. Meanwhile, Democrats have also voiced their displeasure over the regulators’ work, arguing it softens a key piece of the law.

The Volcker Rule, named for the man behind the idea, former Federal Reserve Chairman and Obama adviser Paul Volcker, is intended keep federally-insured financial institutions such as banks from becoming entangled with a slew of risky investments. Lawmakers, eager to avoid a repeat of the broad-based financial crisis, hoped the rule would insulate banks from problems caused by riskier investments.

As lawmakers return for the 2012 session, one of the first items on the congressional agenda will be grilling regulators before the House Financial Services Committee on that cornerstone of the Wall Street overhaul.

Top officials from the Commodity Futures Trading Commission (CFTC), Federal Reserve, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Office of the Comptroller of the Currency will appear before the panel, as it remains murky exactly how this provision will become a reality. And Republicans are far from convinced it can work.

“From the beginning there have been serious concerns that this complex regulation will hinder American markets, competitiveness and job creation,” said Committee Chairman Spencer BachusSpencer Thomas BachusManufacturers support Reed to helm Ex-Im Bank Manufacturers ramp up pressure on Senate to fill Ex-Im Bank board Bipartisan group of House lawmakers urge action on Export-Import Bank nominees MORE (R-Ala.).

The rule seeks to ban “proprietary trading” by banks, which is when they make financial trades with their own cash for their own profit, not at the request of clients. Furthermore, the rule seeks to set up a firewall between those institutions and riskier investment shops like hedge funds and private equity firms. Both provisions carry some exceptions.

However, turning that idea into a reality has been a massive headache for regulators. As proof of how complex it is to make that fundamental idea into actionable rules, one need look no further than the original proposal put forward by most regulators in October; it spans nearly 300 pages and asks for the public to weigh in on almost 400 specific points while rule-writers continue working out the kinks.

Business and financial groups, as well as congressional Republicans, have told regulators to slow down on the rule, arguing a shoddy implementation would do far more harm than good. 

A study commissioned by the Securities Industry and Financial Markets Association (SIFMA) determined that the current “overly restrictive” proposal could cost the financial market billions of dollars. By cracking down on the trading financial institutions can engage in, financial products like corporate bonds become less liquid and more expensive to sell. The study found that corporate bond issuers might have to pay as much as $42 billion more a year to issue and pay for debt in the roughly $3 trillion market.

Financial players are pushing for a rule that allows for broad exemptions and plenty of flexibility, so firms can continue the trading they say is necessary for healthy markets.

Further exacerbating concerns about the rule is the fact that America’s international counterparts so far have not adopted a similar rule, driving concern that U.S. institutions could be working from a fundamentally hindered position.

But Democrats have not been shy about voicing their displeasure, warning regulators that they are carving out loopholes that will prevent the rule from cracking down on the dangerous behavior that allowed the financial crisis to happen.

On Wednesday, the CFTC finally caught up with other regulators and took its own crack at designing a way to implementing the Volcker Rule. While all other involved regulators signed on to October’s joint effort, the CFTC did not join in, still at work on its own take. Its proposal largely mirrors the one put forward this fall, but even within the CFTC there was disagreement about the rule, as it was approved by the commission on a 3-2 party-line vote.

The two Republican commissioners, Jill Sommers and Scott O’Malia, were not shy in critiquing the agency’s work.

“It is an unworkable solution that is entirely too complex and provides the Commission with little-to-no means to enforce — and to deter violations of — the rule,” O’Malia said.

With the CFTC lagging, the other regulators announced shortly before Christmas they were extending the comment period on their proposal. Business groups including the U.S. Chamber of Commerce, as well as top House Republicans, had called for more time to digest and critique the proposal, given its significant reach.

Comments originally were due by Jan. 30, but have been pushed back by a month. The CFTC’s version of the rule is open for comment until March 11.