It’s Official: Regulatory Agencies Release Draft Volcker Rule

Releasing the hotly anticipated Volcker Rule Tuesday, federal regulatory agencies proposed banning banks from deploying their own capital as collateral in bets on uncertain investments.

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The ""FDIC"":http://www.fdic.gov/ board signed off on announcing the ""draft rule"":http://www.fdic.gov/news/board/2011Octno6.pdf, with the ""Federal Reserve"":http://www.federalreserve.gov/, ""Office of the Comptroller of the Currency"":http://www.occ.treas.gov/, and ""Securities and Exchange Commission"":http://www.sec.gov/ following suit with their own versions. The ""Commodity Futures Trading Commission"":http://www.cftc.gov/index.htm will likewise issue a version of the rule in the near future.

Enacting Section 619 of the Dodd-Frank Act, the draft regulation vaguely proposes a two-month wait period for financial institutions trading in on investments, more managerial heft from executives, and guidelines that discourage institutions from risk-hedging, among other requirements.

Initial reactions poured in to news outlets and in the form of statements from across the industry. The consensus: analysts and market watchers believe the rule will leave more negative and long-lasting effects than positive.

""There aren't bright lines on many questions and that will make it difficult for banks to put in place their compliance regime,"" _Bloomberg News_ quoted Kim Olson, a Deloitte & Touche LLP principal and regulator, as saying.

""The Volcker Rule, with its clear ban on proprietary trading and material conflicts of interest, could be a crucial tool for refocusing banks on the needs of their real economy

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customers and away from manipulating the system to maximize their short-run profits,"" ""_The New York Times_"":http://dealbook.nytimes.com/2011/10/11/wall-street-and-washington-react-to-volcker-rule/ quoted Marcus Stanley, policy director with ""Americans for Financial Reform"":http://ourfinancialsecurity.org/, as saying.

The _Times_ quotes Stanley as adding, ""Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute├â┬ó├óÔÇÜ┬¼├é┬ª the vagueness of the proposal and the broad scope of the exceptions granted mean that in its current form it will not produce the changes we need.""

The rule's biggest critics emerged from the banking industry.

Commenting on the rule, ""Frank Keating"":http://www.aba.com/Press+Room/fkeating_bio.htm, president and CEO of the ""American Bankers Association"":http://www.aba.com/default.htm, said in a ""statement"":http://www.aba.com/Press+Room/101111VolckerRuleStatement.htm that the ""banking industry fears the oversized nature and complexity of this proposal rule will make it unworkable and will further inhibit U.S. banks' ability to serve customers and compete internationally.

""How can banks comply with a rule that complicated, and how can regulators effectively administer it in a way that doesn't make it harder for banks to serve their customers and further weaken the broader economy?"" he asks.

Keating went on to delineate consequences he tied to research by regulators. Among other problem areas, he cited a workload that would force bankers to work some 6.6 million hours to implement the regulation, with ""more than 3,000 bank employees"" spending their time and effort in strict compliance.

""They will be transferred to a role that provides no customer service, generates zero revenue and does nothing for the economy,"" he added.

Federal regulatory agencies will receive public comment until January next year. The abovementioned agencies must vote to approve the rule before it goes into effect for banks and markets.

The announcement follows a leak of the draft memo responsible for generating a bevy of attention from bankers, their attorneys, and market watchers last week.