WASHINGTON — Acting Comptroller of the Currency Keith Noreika is floating the possibility of unilaterally reinterpreting an interagency ban on proprietary trading, but there are doubts about how far the agency can move on its own and whether that would be a good idea.
Banks have long complained about the Volcker Rule, arguing that it's overly complex and burdensome to comply with, and it has become a prime target of the Trump administration. But the ability of the OCC to move on its own to reinterpret the rule, which required five agencies to implement, is questionable, according to experts.
“Volcker is a little bit more complicated because there is a statutory requirement for an interagency rule,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics. “This is where the details start to matter.”
The issue was raised in an interview with The Wall Street Journal published Thursday, in which Noreika said “there’s a lot that can be done” by the five regulatory agencies in providing clarity to banks on what qualifies as proprietary trading for the purposes of the Volcker Rule. But if those interagency avenues don’t pan out, the OCC could also act by itself.
“I hope we don’t have to get to this, but there could be things that could be done even by our agency unilaterally if we had to,” Noreika said, citing “reinterpreting what is proprietary trading” as an example. “The ultimate problem with the Volcker Rule is no one knows what prop trading is.”
Comments by an OCC spokesman on Thursday appeared to suggest Noreika was not contemplating having the agency write its own rule, but altering how it enforces the existing one.
“The agency has authority to issue guidance and examination procedures independently to clarify what’s in a rule wherever clarification may be needed," the spokesman said.
The Volcker Rule, part of the Dodd-Frank Act, bars banks from engaging in so-called proprietary trading — that is, buying and selling for its own account. The logic behind the ban, as articulated in an op-ed by former Federal Reserve Chairman Paul Volcker, was that it would eliminate the conflict of interest that could arise with banks investing their customers’ funds in such a way that would ensure that the banks’ proprietary accounts are enriched while the customers’ investments are diminished.
But while the concept was simple, the rule implementing it was not. The agencies took years to issue the final rules, primarily because the agencies wanted to preserve banks’ ability to hold products on their own accounts for the purposes of market making, which is ultimately for their customers’ benefit. What resulted was a confusing mess, according to observers.
“The original interagency Volcker Rule wasn’t crafted with the focus of, how do we make this work?" Petrou said. “It was crafted … to think of every possible scenario for every possible institution in each one of the five agencies, and embody it in a rule — which, unsurprisingly, ends up in a giant, unimplementable blob.”
The idea that the Volcker Rule needs improvement is widely shared. Former Fed Gov. Daniel Tarullo said in his parting address last month that the Volcker Rule as it was originally conceived was “too complicated” — primarily in the sense that it relies on the bank’s intent to decide what is proprietary trading and what is not.
“The hope was that, as the application of the rule and understanding of the metrics resulting from it evolved, it would become easier to use objective data to infer subjective intent,” Tarullo said. “This hasn’t happened, though. I think we just need to recognize this fact and try something else.”
Even though the Volcker Rule is an area of financial regulation widely believed to be ripe for revision, getting all five agencies — the Commodity Futures Trading Commission, the Securities and Exchange Commission, the Fed, the OCC and Federal Deposit Insurance Corp. — to move with one voice is easier said than done.
Further complicating matters is the fact that the Volcker Rule is actually made up of four separate but related regulations, Petrou said. There are individual rules developed exclusively for the CFTC and SEC that apply only to those markets regulated by those agencies. There is a third rule that applies only to the Fed as it pertains to bank holding companies and their covered nonbank affiliates. And the final rule is a joint rulemaking devised by the OCC, FDIC and Fed — meaning that the OCC is unable to issue a formal rulemaking related to the Volcker Rule on its own, she said.
Wayne Abernathy, executive vice president or financial institutions policy and regulatory affairs at the American Bankers Association, agreed that there are limits on how far an agency can go on its own. There are also risks associated with having one of the agencies adopt an interpretation that clashes with another — particularly in areas or related to products that could fall under multiple jurisdictions.
He said it would be preferable for the Treasury to lead efforts to reinterpret the Volcker Rule, since they can serve as an honest broker without any jurisdictional authority over the banking industry to win or lose.
“I think that’s why you need to involve Treasury in leading the effort, because Treasury can monitor that danger and where they see these conflicting or contradictory areas, they can" resolve it, Abernathy said. “And people can trust Treasury to play that role, because they’re not fearful that Treasury is trying to gain some turf.”
Abernathy said that OCC has a fairly wide berth to apply and interpret the existing Volcker Rule, especially in those areas that are firmly within its jurisdiction — like the buying and selling of financial vehicles that remain within the purview of nationally chartered banks. But all of that may be an academic exercise, because the other regulators will probably be on the same page, or close to it, when it comes to reconsidering Volcker, he said — even in the near term. The CFTC and SEC already have Trump-appointed heads, he said, in addition to Noreika, who may well be serving as acting comptroller for some time before a permanent comptroller is installed.
“I think the Fed, with [Gov. Jerome] Powell looking at things, they may be open to looking at things differently, too," Abernathy said. "And when that happens, I don’t know that you would see FDIC as a holdout. I think they’d be willing to engage in the process.”
Former OCC regulator Martin Pfinsgraff said that while there are risks associated with moving unilaterally, there are also risks associated with waiting for everyone to catch up. If a rule is costly and wasteful, and if the OCC is in a position to grant some sensible relief, there’s no reason not to, he said.
"You've got to try to get others to go along with you. But if it is the right thing and you think it's having a bad impact on the industry and on safety and soundness, then I think it is appropriate for an agency to act unilaterally,” Pfinsgraff said. “They need to be prepared to take the heat if they do that, but that is why we have independent agencies.”