The Volcker Rule Under the Trump Administration
The so-called Volcker Rule—named after Paul Volcker, a former chairman of the Federal Reserve Board—was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act which forbids a banking entity from participating in proprietary trading or owning a hedge fund. The rule was designed to prevent banks that receive federal and taxpayer backing in the form of deposit insurance and other support from engaging in risky trading activities.
The Volcker Rule has been criticized for its complexity in practice and difficulty in consistent application. This complexity is compounded by the fact that five federal agencies are involved in the process of defining and enforcing the Volcker Rule. The final draft of the rules which comprise the Volcker Rule were approved by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC) and the Commodity Futures Trading Commission (CFTC). Further difficulty is added by the fact that different agencies are tasked with enforcing the Volcker Rule on different trading desks within the same banks. For example, the OCC oversees trading within national banks, the SEC regulates broker-dealers and the CFTC regulates swaps dealers. J.P. Morgan Chief Executive, James Dimon, was quoted as stating that in order to enforce the rule the regulators would need a lawyer and a psychiatrist to assess the intent of every trader.
The election of Donald Trump has raised the question of whether the Volcker Rule will be repealed as part of the promised dismantling of Dodd-Frank. As with many campaign promises in any election cycle, the final action of the elected official may not completely conform to the rhetoric of the campaign trail. In that regard, the point person on the president-elect’s transition team for the selection of financial regulators is Paul Atkins. Mr. Atkins is a former member of the U.S. Securities and Exchange Commission under President George W. Bush. “During Atkins’s SEC tenure, he was an outspoken critic of regulations that forced hedge funds to register with the agency and a requirement that mutual fund boards be led by independent chairmen. He also voiced frequent opposition to imposing large fines on corporations, arguing that such sanctions disproportionately hurt shareholders rather than wrongdoers.”1 This leadership in the transition team could indicate a move away from the type of restrictions imposed by the Volcker Rule. Indeed, President-elect Trump’s selection for treasury secretary, Steven Mnuchin has already said he will roll back the Volcker Rule.
In a recent article, the Wall Street Journal suggested that the Volcker Rule may not need to be repealed to be undermined.2 As opposed to attempting to repeal the statute, a move that would require at least some Democratic support in the Senate, the new administration could simply choose not to enforce the Volcker Rule until it is decided what final action to take. In light of the relative recency of the approval of the final implementing rules and the infancy of any enforcement activities, the Volcker Rule could effectively be marginalized through inaction as opposed to action by the Trump administration.
- Bloomberg Politics, Trump Said to Tap Critic of Wall Street Rules to Aid Transition, November 9, 2016
- Wall Street Journal, How to Kill the Volcker Rule? Don't Enforce It, November 28, Ryan Tracy and John Carney
Return to "Emerging Trends" table of contents.