If you tune in to any sort of news-oriented media, you might have recently heard references made to the Volcker Rule. Yes, I fought the urge to make the Vulcan hand symbol too when I first was introduced to the Volcker rule years ago. As the title of this article suggests, the Volcker Rule does not (sadly!) have any relation to the Starship Enterprise.
So you might be wondering now, “What exactly is the Volcker Rule, and does it affect me?”
I am glad you asked, and yes.. it does!
The Volcker Rule, simply put, is a banking compliance regulation that prohibits banks from making risky moves with government insured funds. Due to the fact that speculative activity played a major role in the 2008 financial crisis, a targeted and concerted effort is being made to ensure that banks don’t make speculative moves with money going forward.
The Volcker Rule is another piece of Dodd-Frank that helps to keep consumers safe and banks more transparent. The Volcker Rule prohibits US banks (and foreign ones too) from rewarding risky trade behavior and hedging on portfolios. This new shift in transparency and honesty could change the landscape of Wall Street to…dare we say it… a safer one.
So what does the Volcker Rule mean for you? How does this affect your bank?
Commercial banks with hedging and collateralized debt obligations (CDOs) are hit the hardest with the Volcker Rule. An increased internal focus on compliance teams and reporting is in the future, and a more ethically sound money making culture is the desired output. As for community banks, the Fed is going to be a little more lenient with CDO invested banks, but they are not out of the clear. Any community bank that has CDOs that were purchased prior to the financial melt-down, well, they will get to assume those as write-downs for their financial safety and soundness exam. HOWEVER, it will be on the shoulders of community banks to sell off that debt and take losses on the previously purchased portfolios.
Did I just make your head spin? I know, it can be a little confusing. I think it can more easily be broken down here. The Volcker Rule is putting the kibosh on holding onto any speculative investments and portfolios if you are a banking system. You gotta get rid of it, and don’t head down that path again. This rule wasn’t written or designed to save businesses, but rather, to preserve the much larger ecosystem of the U.S. banking landscape. This new idea of a safer and more visible banking market is going to cost banks quite a lot of money – which means there will seemingly be a lot of opportunities for banking merger / acquisition plays in the coming year.
If there is one thing that WMP knows about, it is how to navigate the field of banking transformational change. As these regulations begin being enforced, we encourage you to connect with the WMP Banking team for a proactive banking strategy development.
Ragan Blanchard is a consultant in our Banking Practice, based in our Seattle office. Please feel free to leave comments below, or reach out to her directly at firstname.lastname@example.org.