Changes to Volcker coming with or without House bill

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The House passed a bill last week seeking to modify the Volcker Rule, earning a hefty dose of support from Democrats. Yet while the legislation’s future remains in doubt, changes to the Dodd-Frank Act’s controversial ban on proprietary trading are all but a given at this point.

The measure would exempt community banks under $10 billion of assets from the ban on proprietary trading — and, crucially, would cede primary authority for the joint rule to the Federal Reserve.

While the carve-out for small financial institutions has already been blessed by moderate Senate Democrats as part of a larger package of regulatory reforms, the provision giving the Fed sole rulemaking authority for the regulation remains in doubt. Currently, the rule is jointly overseen by five agencies: the Fed, the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Securities and Exchange Commission and the Commodity Futures Trading Commission.

By putting the central bank in charge of the Volcker Rule, supporters of the bill hope to streamline how the rule is implemented, by having one agency they can tap to clear up questions about how to interpret it. (Supervision and enforcement under the bill would be carried out by an institution's primary regulator.) Yet the provision, if signed into law, would also open the door for regulators to approve more substantial changes to the rule much more quickly.

“If the bill does not pass, the work will eventually get done, but it will inevitably be trapped in a quagmire of shared bureaucratic responsibility,” said Mark Nuccio, a partner at the law firm Ropes & Gray.

The banking industry has long contended that there are simply too many cooks in the kitchen when it comes to the Volcker Rule — and even with Trump-appointed regulators now at the helm of nearly all of the financial agencies, working out a deal among the various camps is bound to take time.

But the question is whether the House measure can pass, despite a strong vote out of the chamber — including support from 78 Democrats.

The provision putting the Fed in charge is not expected to be included as part of the Senate regulatory relief package being considered by the House, although the exemption for community banks may soon be signed into law as part of that broader effort. And while Fed the measure could hitch a ride on must-pass spending legislation later this fall, the odds don’t look great at this point.

The support from House Democrats does give the provision a critical boost for potential consideration in future legislative packages, but it has also been criticized by Rep. Maxine Waters, D-Calif., ranking member of the Financial Services Committee, and other progressives.

From a messaging standpoint, the bill could prove to be a tough sell given that changes to the Volcker Rule stand to benefit many of the country’s largest banks. Rep. Jeb Hensarling, R-Texas, the committee’s chairman, has been seeking to include roughly two dozen bills with bipartisan support into the Senate’s regulatory relief package, many of which might have a stronger shot at inclusion in a later legislative effort.

“It is far easier to construe this bill as pro-Wall Street than most of the other provisions on Chair Hensarling’s wish list,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

Yet at this point, it’s also not clear that regulators even need the provision.

The banking agencies and the Trump administration have long signaled that they’re pursuing changes to the rule. The Treasury Department outlined a number of reforms they’d like to see last summer in their report on banking regulation, and the OCC reportedly circulated a draft of potential changes to the rule earlier this year. Federal Reserve Vice Chairman for Supervision Randal Quarles said in March that the agencies are targeting a handful of “material changes,” including clearer definitions for core terms used under the rule, such as what constitutes “proprietary trading,” and better tests for determining whether a trade should be permitted under the rule’s market-making exemption.

Of course, such tweaks fall far short of what Republicans, and many banks, would prefer: a full repeal of the rule. House lawmakers passed such a provision last year as part of the sweeping Financial Choice Act, but it did not gain any traction with Democrats.

Without more of a helping hand from Congress, the regulatory push has been moving forward in earnest. Those tracking the effort say regulators could move forward with reforms as soon as this summer — after the confirmation of Jelena McWilliams, who’s been tapped to head the FDIC.

Trump-appointed regulators may also soften their supervision of the rule, which could lead to meaningful changes for the banking industry on the ground, even without a formal rewrite.

Passage of the House bill would no doubt speed up efforts to overhaul the rule, though there’s little doubt that changes are afoot either way.

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