The Volcker Rule, a linchpin of U.S. financial regulation, is under attack from two directions this week, and with one of its leading supporters leaving office, it may be more vulnerable than ever.
House Republicans assailed the Volcker Rule, which would place severe restrictions on proprietary trading and limit investments in private equity, in Congressional meetings with U.S. regulators and representatives for major major banks this week.
Hensarling Attacks Volcker Rule
Rep. Jeb Hensarling, the incoming chairman of the Financial Services Committee has been an outspoken critic of the Volcker Rule.
“I think we have all taken note of Chairman Volcker’s statements that, number one, proprietary trading at the commercial banks was not central to the crisis, and that he has expressed concern with the rule bearing his name,” said Hensarling. “I don’t think he’s giving his offspring up for adoption, but he doesn’t seem to be well-pleased with it.”
Hensarling’s message is part of a larger argument delivered before Congress this week by representatives from the financial industry. Their argument takes the form of a trade-off. They will argue for higher capital standards instead of a ban on proprietary trading.
So far Congressional representatives have internalized the argument from industry representatives. Here is Spencer Bachus, outgoing chairman of the Financial Services Committee:
“The Volcker rule is designed to prevent proprietary trading by banks. But no one, not even Paul Volcker himself, argues that proprietary trading was a cause of the financial crisis.”
Volcker and SEC
This argument comes into conflict with recent news that the SEC pressured JPMorgan to implement Volcker-informed inquiries prior to its own recent proprietary trading scandal: the London Whale trade that lost the bank more than $6 billion.
Today, as Mary Schapiro leaves the SEC, the realization and implementation of the Volcker Rule is now mired in uncertainty. With Schapiro’s departure, the Commission is now deadlocked at a 2-2 divide over the Volcker Rule. Until President Obama succeeds at appointing a new commissioner, the Volcker Rule will remain under attack with at least one less powerful advocate.
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