The Volcker rule is expected to result in a greater
competitive disadvantage for small banks, even if regulators
make improvements to the rule set to be finalised by the end of
This is because section 619 of Dodd-Frank makes no mention
of the size of institutions subjected to prohibitions on
proprietary trading, and regulators are not thought to have the
jurisdiction or the will to provide a small bank exemption not
considered in the legislation.
Small banks do not have the compliance staff or resources of
larger banks and could be captured by a largely unclear
definition of proprietary trading that might include small-bank
market-making, asset liability management and hedging
"Dodd-Frank compliance is deepening and widening the moat
around large banks, making it harder for small banks to compete
with large banks," said Donald Lamson, a counsel at Shearman
& Sterling who helped draft Dodd-Frank as an attorney with
the Treasury Department.
Lamson said regulators have less authority to create
exceptions in the Volcker rule than in other legislation.
"That’s one of the weaknesses in the drafting,"
Lamson added. "The ability to write a rule should be
accompanied with the ability to make exceptions so unintended
consequences can be minimised and mitigated."
An exemption for small banks will probably have to come in
the form of a legislative fix. House Financial Services
Committee chairman Spencer Bachus requested comment on Volcker
rule alternatives last month in preparation for a hearing on
possible legislation yet to be scheduled but expected this
The American Bankers Association (ABA) responded on the
September 7 deadline. Among the ABA’s
recommendations – first and foremost being total
repeal of the Volcker rule – was a request that
legislators sharpen the rule’s focus on what
constitutes prohibited activities so small and mid-sized banks
could manage their activities accordingly.
Timothy Keehan, vice president and senior counsel at the
American Bankers Association, said the Volcker rule was clearly
intended to regulate large banks, hedge funds and private
equity funds based on how the administration introduced the
rule and how Congress described it.
"Nowhere was it originally intended to have the Volcker
rule provide to every single bank," Keehan said. "I
don’t think the regulators would have comfort
putting together an asset-size exemption [because] there was
nothing in the legislation talking about a particular type of
institution or size of institution."
Regulators, while hampered in their ability to provide an
exemption for small banks, might be able to provide some
guidance on the activities that expose them to Volcker rule
violations. This is not an area of much optimism, though.
Dodd-Frank delegates Volcker Rule implementation and
enforcement authority to the Federal Reserve Board, the Federal
Deposit Insurance Corporation, the Securities & Exchange
Commission, the Office of the Comptroller of the Currency and
the Commodity Futures Trading Commission (CFTC). Regulators
issued a proposal
last October, with the CFTC releasing its
companion proposal months later.
It might be difficult for five different regulators to agree
on some focused definitions of the activities qualifying as
proprietary trading. Bankers’ attorneys are
concerned the final rule could result in fragmented
"It could possibly be a disordered, patchwork quilt of
regulations and interpretations – that’s
the fear," said Keehan.
The ABA, in its comment letter to chairman Bachus, suggested
legislation to name the Federal Reserve as the lead agency for
interpretation of the Volcker rule.
"That’s the way to have written this," Keehan
said. "The Federal Reserve with consultation should have final
FDIC chairman Martin Gruenberg
said on Friday the Volcker rule is on pace to be finalised
by the end of the year. Banks would be required to comply by
July 2014 if the rule is finalised without legislative changes
– unexpected in absence of a Republican majority of
60% needed to prevent a filibuster in the Senate.