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Banks Get Some Relief in Volcker-Rule Changes

21 August 2019   |  

Banks Get Some Relief in Volcker-Rule Changes

US regulators are easing some of the regulatory headwinds that have faced US financial institutions since Dodd-Frank’s 2010 passage. The recent focus has been on some of the more complex and onerous Volcker rule requirements—which sought to limit banks’ ability to speculate with their own funds. The rule is based on the assumption that such short-term trades only benefit the banks—not their customers—and should therefore be limited. Further, the rule put the onus squarely on the banks to prove otherwise for every transaction that occurred within a 60-day window. 

The assumption is faulty, though. Short-term trading is not a zero-sum game between the bank and its customers—that is, because a bank turns a profit on a transaction does not automatically mean its customers therefore must have incurred some sort of cost or otherwise been injured. (Rather the opposite could be argued: If the bank isn’t somehow able to turn a profit on its activities, why would it continue operating? Seems customers are vastly better off if their banking institution stays in business. But we digress.) 

Motivations aside, the rule has proven onerous for banking institutions both small and large given the complexity of reporting such transactions and the challenge represented by bearing the burden of proof—a requirement which effectively concludes the banks are generally guilty until proven innocent. 

The latest moves are intended to ease some of these unintended consequences by imposing a trading volume threshold, below which banks would be presumed to be in compliance with the law. While we would submit it might be preferable to address the faulty underlying assumption instead of merely limiting some of the consequences thereof, it seems like a step in the right direction.  

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