Financial regulators have a clear message for large banks: They will not be able to benefit from regulatory relief intended for small community banks.
On Tuesday, regulators clarified that large banks will not be permitted to resume proprietary trading under a post-crisis regulation known as the Volcker Rule, setting up a legal battle over the correct interpretation of a bill passed in May offering some exemptions to smaller institutions.
Alternative Interpretation
As Yahoo Finance reported less than two weeks ago, large banks are hoping to take advantage of some double negatives in the law that may have opened the door for firms larger than $10 billion to get exemptions from the rule.
The Volcker Rule, part of the Dodd-Frank regulatory framework, generally prohibits banks from engaging in short-term proprietary trading designed to boost corporate profits instead of helping clients and customers.
In May, President Donald Trump signed a bill offering regulatory relief to smaller banks, including an exemption from the Volcker Rule for “community banks.” But double negatives in the bill made it unclear if banks needed to have less than $10 billion in total assets and less than 5% of their total assets in trading assets and liabilities, or if the negatives flipped the “and” into an “or.”
Under the alternative interpretation, banks far above $10 billion could get an exemption as long as they also have relatively small holdings of trading assets and liabilities. Although this would not affect the mega-banks like JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), or Wells Fargo (WFC), banks as large as U.S. Bancorp (USB) and PNC Financial (PNC) could escape from the regulation, effectively allowing those institutions to get into risky proprietary trading for the sake of extra profits.
Yahoo Finance reported that a former regulator, Keith Noreika, was consulting a number of larger banks on the possibility of filing a lawsuit over that interpretation.
‘This was not the intent’
On Tuesday, an alphabet soup of regulators — Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures and Trading Commission — released a notice of proposed rulemaking clarifying that banks will need to “satisfy two conditions” to qualify for the exemption.
"First, the insured depository institution, and every entity that controls it, must have total consolidated assets equal to or less than $10 billion. Second, total consolidated trading assets and liabilities of the insured depository institution, and every entity that controls it, must be equal to or less than five percent of its total consolidated assets."