In a strongly worded letter to Federal Reserve Chair Ben Bernanke, Rep. Maurice Hinchey (D-NY), Rep. Peter Welch (D-VT), and 15 other House members urged the Fed and other federal regulators to reject the current draft of the Volcker Rule regulations and replace them with stronger language to prohibit commercial banks from engaging in investment activities. Citing the current version of the Volcker Rule as unnecessarily complex and filled with loopholes, the letter contends that the Fed's current draft of the rules fails to protect bank deposits from risky trading activities and falls short of what the Dodd-Frank Act intends.
Unfortunately, the Federal Reserve's draft Volcker rule is unnecessarily complex and includes several large loopholes that undermine Congress's intent to protect banking deposits from trading activities. For example, under the draft rule, commercial banks would be allowed to engage in market making and hedging activities that can provide easy cover for risky proprietary trading.
The letter also points out that the myriad loopholes in the current version of the rule make it nearly impossible to for regulators to enforce effectively.
These large loopholes will not only allow banks to continue the risky activities the Volker Rule was designed to prohibit, but they will make enforcing the Volcker Rule incredibly difficult. Under the draft rule, regulators will be challenged with determining whether banks are masking prohibited trading under the guise of one of the many exemptions under the rule.
The authors also criticize the draft rules for relying too heavily on banks to self regulate and self report.
In essence, the 17 members of Congress want what
Volker himself said in a recent interview that he wants from the rules:
I'd love to see a four-page bill that bans proprietary trading and makes the board ad chief executive responsible for compliance. And I'd have strong regulators. If the banks didn't comply with the spirit of the bill, they'd go after them.
As the parameters and loopholes of the Volker Rule continue to be negotiated, it remains far from certain whether the final rule will look more like the more clear cut separation between commercial and investment banking that existed under Glass-Steagall, or a more nuanced rule tailored to the demands of a more global financial system.