Certain bank rule is noble in principle, problematic in practice
© Getty Images

As every new administration settles into Washington, D.C., talk arises about the new policies that will settle in with it. These days, policymakers are buzzing about tax reform, regulatory relief and more; but the theme that transcends them all is economic growth.

It’s a long-overdue conversation that the business community has welcomed with renewed optimism for the future. 

ADVERTISEMENT

Businesses are the engines of economic growth. Companies of every shape and size need to be able raise capital efficiently and affordably in order to launch, operate and expand. The Volcker Rule is so problematic because it jeopardizes that essential ability.

 

There was merit in the intent of the Volcker Rule, which aims to prohibit banks from engaging in certain speculative, proprietary trades, thereby enhancing financial stability. The regulation has fallen far short of that goal, however, and inhibits growth as well.

In practice, the Volcker Rule has imposed a complex web of regulatory compliance upon financial institutions, hindering businesses’ ability to obtain the financing they need to grow.

Recognizing that the implementation of the Volcker Rule would bring significant negative consequences to bear on business, the U.S. Chamber opposed the rule from the outset. Instead, the Chamber proposed higher capital standards as an alternative.

Process matters, too, and the Volcker Rule got off on the wrong foot when it was incorporated into the Dodd-Frank Act at the 11th hour. There was exactly one hearing on the rule. During that hearing, serious doubts were voiced about how it could be implemented.

Regulators didn’t study the impact of the rule on the business community and the broader economy. Pursuing evidentiary analysis — and subjecting it to public scrutiny and comment — is a critical step in developing any regulation that could promote both stability and growth.

Unfortunately, many of the business community’s greatest concerns with the Volcker Rule are materializing. The Chamber warned early on that American businesses would feel compelled to hold greater cash reserves in response to the rule, though they traditionally benefit from liquid financial markets.

Since the Volcker Rule, U.S. corporate cash reserves have risen by $100 billion, and cash at the S&P 500 has risen by over 50 percent, hitting all-time highs since Dodd-Frank was passed.

Even though corporate bond issuances have increased, there are fewer market-makers, more unfilled orders and decreased bond market liquidity, leading to unexplained stresses on the marketplace. A 2016 report commissioned by the Federal Reserve attributed the bond market stress to the Volcker Rule.

Many of these issues could be attributed to several factors, but one thing is for sure — the Volcker Rule didn’t help. The rule has undoubtedly been an exacerbating force.

In combination with other initiatives — Basel III, systemic risk rules, foreign bank operation rules, risk retention rules and new money market fund rules — it has made business financing more inefficient and, accordingly, economic growth more difficult. 

Your doctor looks at drug interactions when prescribing your medicine. Unfortunately, regulators don’t follow that practice when it comes to rules that may interact with each other. These impacts of the Volcker Rule are still working their way through the system, but the good news is there’s time to fix them.

We hold fast to the idea that the Volcker Rule should be repealed, but we also recognize the breadth of its influence and the fact that there are those who would like to see some form of the rule remain in place. Moving forward, the Volcker Rule simply cannot be viewed in a vacuum; it must be viewed in conjunction with other rulemakings.

With that as a foundation, Congress should direct the regulators to conduct an economic analysis of the Volcker Rule to include its impact on business financing, as well as the consequences for financial institutions and the economy as a whole.

From there, an additional analysis should be done to determine how the entire slate of regulatory initiatives undertaken since the financial crisis interact with each other; and the economic ramifications of those actions. Those studies should inform a recommendation from regulators to Congress about whether the Volcker Rule (and others) should be amended or repealed outright. 

The Volcker Rule, though directed at banks, has harmed the ability of non-financial businesses to operate and expand. Now is the time to develop policies that will promote both financial stability and economic growth.

 

Tom Quaadman is the executive vice president for the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.


The views expressed by contributors are their own and not the views of The Hill.