Fixing the Vague, Complex Volcker Rule

Tweak Appropriate Despite Recession Fears, Rossi Says

Aug 21, 2019
Finance

SMITH BRAIN TRUST – This week’s loosening of the Volcker Rule – designed to prevent banks from making speculative investments that do not benefit their customers – has drawn polar reactions.

Consumer advocates, including Democratic lawmakers, criticized the move as a risk to taxpayers amid fears of a looming recession. Rep. Maxine Waters, chair of the House Financial Services Committee, told Politico the revision “will not only put the U.S. economy at risk of another devastating financial crisis, but it could potentially leave taxpayers at risk of having to once again foot the bill for unnecessary and burdensome bank bailouts.”

Professor of the Practice Clifford Rossi at the University of Maryland’s Robert H. Smith School of Business takes a different position. He and other regulatory experts say the action appropriately addresses a rule too vague, complex and burdensome.

“Once again, the unintended consequences of broad-sweeping bank regulation in the aftermath of the financial crisis of 2008-2009 rears its head,” Rossi says.

The FDIC and Office of the Comptroller of the Currency took action on Tuesday, approving changes to better clarify and reduce regulatory uncertainty and burden surrounding the Volcker Rule, which requires banks to use their own funds for proprietary trading activities such as hedge funds and private equity investment.

Rossi says the revision removes an “accounting prong” used to determine the types of prohibited trading. Instead, regulators will defer to easier-to-digest models within the original Volcker Rule.

"The Volcker Rule is laudable for attempting to wring abnormal risk from the financial system,” Rossi says. “But it and many other provisions of Dodd-Frank imposed significant new regulatory burden and uncertainty on banks, which is costly for bank consumers and investors.”  

FDIC Chair Jelena McWilliams, in announcing approval of the changes, echoed Rossi: “The rule has turned out to be so complex that it required 21 sets of Frequently Asked Questions.”

This regulatory “tweak” to the Volcker Rule, Rossi says, “is consistent with the ebb and flow of bank regulation where immediately following a crisis, regulators tend to overtighten to the point of choking off or curtailing normal bank activity.”  

“Over time, such regulations are reassessed with the perspective of time and prevailing market conditions," he says. “The trick is to ensure where to draw the line between effective deregulation and over-relaxation of bank regulation.”

The Federal Reserve and the Securities and Exchange Commission must still weigh in on Tuesday's action.

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About the Expert(s)

RossiCliff

Dr. Clifford Rossi is an Executive-in-Residence and Professor of the Practice at the Robert H. Smith School of Business, University of Maryland. Prior to entering academia, Rossi had nearly 25 years' experience in banking and government, having held senior executive roles in risk management at several of the largest financial services companies. His most recent position was Managing Director and Chief Risk Officer for Citigroup's Consumer Lending Group where he was responsible for overseeing the risk of a $300+B global portfolio of mortgage, home equity, student loans and auto loans with 700 employees under his direction. While there he was intimately involved in Citi's TARP and stress test activities. He also served as Chief Credit Officer at Washington Mutual (WaMu) and as Managing Director and Chief Risk Officer at Countrywide Bank.

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