Regulators Begin Volcker Rule Overhaul

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation became the first federal bodies to approve an interagency overhaul of the law that governs the relationships banks can have with private equity firms.

In statements published Tuesday, the OCC and FDIC announced they have approved a final rule to simplify the Volcker Rule, adopting measures clarifying proprietary trading, compliance, short-term trading and limits on banks investing in covered funds—which include private equity.

In addition to introducing a three-tiered compliance system and revisions to short-term trading allowances, the new rule—referred to as Volcker 2.0—would expand some activities banks can engage in with covered funds.

The Volcker Rule still generally prohibits the practice of banks using customer deposits to invest in covered funds or to make other short-term, non-hedging trades that are not on behalf of clients. However, with clearer rules for what kinds of trades are allowed, some reports have speculated that the new rule could lead to increased investment by banks in covered funds, and it is expected that the agencies will issue a further proposal on investments in covered funds in the future.

The OCC and FDIC were the first of five federal agencies to adopt changes to the prominent Wall Street regulation. According to an official summary of the rule, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission are set to adopt the measure at subsequent meetings before the end of the year.

Rulemaking began in July 2018 when the five agencies published a set of proposed revisions, some of which made it into the final rule.

The changes take effect on Jan. 1, 2020 but banking entities have until 2021 to fully adopt them.

The decision by the five agencies continues a deregulatory streak after the same coalition of agencies approved a measure in July to exclude community banks from the Volcker Rule.

This rule change is expected to draw heavy partisan backlash. Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate’s Committee on Banking, issued a statement the day of the announcement, calling the new rule a “Pandora’s box of risking trading and speculation at the expense of American taxpayers.”

Sen. Jeff Merkley, D-Ore., who co-authored the Volcker Rule with former Sen. Carl Levin, D-Mich., also released a statement criticizing the agencies’ decision.

ACG’s public policy team will continue to look into this issue and provide additional analysis in the future.