Prudential financial regulators approved the final Volcker Rule Tuesday, creating a new regulatory construct that essentially imposes limits on large banks engaged in proprietary investment activities.
The goal is to ensure mega banks are not making risky bets with depository funds, creating systemic risk throughout the financial system.
The Federal Reserve and several other regulators — including the Federal Deposit Insurance Corp. — managed to hold meetings early Tuesday to discuss the rule and its finalization.
After years of deliberation, the rule was met with praise from regulators who ushered in the era of mass banking reform.
Sen. Banking Committee Chairman Tim Johnson, D-S.D., released the following statement after the Fed approved the rule.
"Today's approval of the final Volcker Rule is a key milestone in the full implementation of Wall Street reform and these trading restrictions will help improve the integrity of our banking system," the senator said. "I commend all the individuals involved in this monumental effort for the many years of dedication, hard work and inter-agency cooperation that led to today's joint announcement, and I look forward to reviewing the details of this important rule."
Two years ago, when earlier versions of the rule were leaked, Moody’s analyst Peter Nerby suggested the Volcker Rule could have negative consequences for bondholders tied to the largest banks.
One of those consequences is that most market-making revenues at firms "can be viewed as customer-driven proprietary trading,” he wrote at the time. Restricting these activities on market-making and hedging will put bondholders in a credit negative position, Nerby explained.
One of the issues raised Tuesday at the Fed's meeting on the rule was the impact on smaller banks. A Fed attorney answered that question Tuesday, noting that banks with $5 billion or less in assets do not have to be as worried about how the rule will impact their trading positions or about how they will need to comply and report their metrics.
"In terms of metrics, they will apply to banking entities that have $50 billion or more in trading assets, then it goes down to $10 billion in trading assets," the attorney said. "As a bank with $5 billion in total assets you will not have to worry about metric reporting."
The Federal Reserve's full statement on the rule is available here.