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A big-bank loophole to escape Volcker Rule? Not so fast

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There were probably dropped jaws and a lot of head-scratching in banking policy circles Friday following a report that claimed an apparent grammatical error in the regulatory relief law enacted last year created a much bigger exemption from the Volcker Rule than Congress intended.

But there are a lot of reasons why the grammatical oversight in the legislation may be less of a big deal than first believed.

Yahoo Finance published an article reporting that some large institutions are focused on the provision that exempted banks with less than assets of $10 billion from the Volcker Rule, a post-crisis ban on proprietary trading named for former Federal Reserve Chairman Paul Volcker.

Some have interpreted double negatives in the writing of the law to technically exempt much larger institutions as well, according to the article. The language could be read to exempt banks for which trading assets make up no more than 5% of total assets. That would essentially free all but just a few institutions from the trading ban.

But usually these types of clerical errors are resolved quickly and aren’t as big a deal as one might think. For starters, Congress often acts to address them fast, including fixes in must-pass spending or other priority bills.

But even if lawmakers didn’t act, it’s federal regulators who implement the law, and they must do so according to congressional intent. In this case, that means regulators would have to believe Congress wanted to exempt all institutions from the Volcker Rule, not just those below $10 billion. And there’s little to no evidence that’s the case.

“I don’t think anyone who has been involved in the Volcker debate believes that the agencies can or will interpret the statute so as to exempt all but a tiny handful of banks,” said a regulatory lawyer who spoke on the condition of anonymity.

For a bank to bring the matter of the grammatical error to a court after the agencies have weighed in, the institution would have to assert standing and sue its regulator — something banks tend to avoid.

Even if a bank were so inclined, the double negatives in the text of the law would likely lead a judge to conclude that the text was poorly drafted — not that the plain intent of Congress was to effectively nullify the Volcker Rule.

Indeed, all signs point to federal regulators issuing a proposal establishing an exemption just for small banks, as lawmakers say they intended.

“The Fed is going to propose a rule soon to implement this provision, and they are certainly not confused about what the bill says, creative grammarians aside,” said a spokesperson for Sen. Mark Warner of Virginia, a key Democratic supporter of the reg relief law.

A spokesperson for Sen. Heidi Heitkamp, D-N.D., another reg relief sponsor, agreed. “Plain reading of the statute makes it pretty clear the cap is $10 billion,” said the spokesperson. “Both Republicans and Democrats agree on that.”

All in all, if big banks are hoping this is their chance to escape the Volcker Rule, they are almost certain to be disappointed.

Neil Haggerty and John Heltman contributed reporting to this article.

Bankshot is American Banker’s column for real-time analysis of today’s news.

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