By David Henry
NEW YORK Dec 18 The 900-plus page Volcker rule
regulators released last week will not impact big bank trading
revenues as much as banks had feared, said industry executives
and consultants who have finally plowed through the rule.
While the U.S. rule bans banks from making blatant bets on
securities or other assets, it gives them leeway to make
judgments, such as how many assets they should buy in
anticipation of customer demand. Banks had worried they would
have much less leeway than what is being allowed for.
The final rule, required by the 2010 Dodd-Frank financial
reform law, also allows banks to protect themselves by hedging
against price changes in groups of securities, loans, or other
assets, instead of having to hedge individual securities as some
bankers had feared.
"It is fairly manageable for the banks," said David Sapin, a
PricewaterhouseCoopers consultant to big banks. A few days
before the rule came out, some clients were "just nervous about
what was going to happen," he said.
An executive at a major bank, who was not authorized to
speak to the media, said, "There were fears it was going to get
a lot worse...There is some relief."
Bank profits have been hurt by low interest rates and lower
trading volume since the financial crisis, so any benefit that
banks get from the Volcker rule is welcomed by the industry.
Analysts at credit rating service Standard & Poor's last
year said that if the rule were as strict as possible, pre-tax
profits for the eight biggest trading banks could drop by as
much as 15 to 30 percent, vaporizing some $10 billion of total
annual profits. On Friday, S&P said the final rule will not be
Bankers were bracing for the worst after JPMorgan Chase & Co
last year lost $6.2 billion on derivatives trades that
were originally meant to reduce, or hedge, the bank's risk. Many
on Wall Street feared that regulators would make the Volcker
rule as strict as possible to prevent such big losses from
To be sure, regulators have broad discretion in determining
when banks are breaking the rules, which in turn could have a
big impact on how much the Volcker rule costs banks.
"Ultimately, the impact will depend on how regulators
enforce the rule," said David Fanger, a bank credit analyst at
Moody's Investors Service.
And, unusual items on some bank balance sheets could be hit
surprisingly hard, as has happened already with certain
instruments that small and mid-sized banks bought up before the
financial crisis, known as "collateralized debt obligations."
Zions Bancorp said on Monday that it expects to
take a charge of up to $387 million to update the value of its
CDOs because the rule will require that they be sold. The
American Bankers Association on Tuesday called on regulators to
give "prompt attention to the serious and unintended
consequences" of the rule on trust preferred securities that
have been bundled into CDOs.[ID: nL2N0JX1NO]
Another negative with the rule is that banks will have to
file reports to regulators justifying their trading decisions,
which could boost their costs. The rule "is going to be very
difficult and expensive to administer," said Rodgin Cohen, a
lawyer for big banks and senior chairman at Sullivan & Cromwell.
The Federal Reserve and four other U.S. agencies released
the final rule more than two years after they requested comments
on a draft measure. Banks, trade groups,
investors, and other parties sent some 18,000 comment letters.
The rule is intended to fix a problem with too-big-to-fail
banks: their profits are enjoyed by shareholders, while their
losses, if big enough, are borne by taxpayers. That asymmetry
could encourage bank employees to take big, speculative bets.
Banks had feared that their "market making" activities,
where they buy and sell securities, derivatives, and other
instruments to investors, would be hurt by the rule. When a bank
buys an asset, it is not always clear to outsiders if it is
doing so because it expects customers to buy the asset in the
future, or to make a bet on the price of that asset.
Under the final version of the Volcker rule, banks can
judge, subject to review by regulators, how much inventory of
assets they need to meet demand. The original proposal suggested
regulators might put caps on inventories.
The flexibility that the final rule allows for banks to hold
inventory should yield more revenue, Moody's analyst Fanger
The final rule also allows the banks to make trades that
they judge to be hedges against multiple securities or
instruments. News reports before the rule came out said that
there would be strict prohibitions against hedging portfolios,
which could have forced banks to avoid trading certain
instruments because they would not have been able to reduce
their risk, said Bob Maxant, a bank consultant and partner at
Deloitte & Touche.
"Greater judgment may allow for greater inventory and that
might allow greater revenue," Maxant said.