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Banks say Volcker plan threatens 'safe' activity

by Ira Teinowitz in Washington | Published February 8, 2012 at 10:27 AM

Banks that face a ban on proprietary trading under the current proposal of the Volcker Rule are pleading with government officials to return to the drafting table and write a much narrower version.

Regulators' attempt to implement the Volcker Rule ban on trading by banks for their own accounts is generating strong warnings from institutions that could be covered as the Feb. 13 deadline for filing comments nears. The Volcker Rule is mandated by the Dodd-Frank financial reform law.

The Securities and Exchange Commission, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission have worked together to create a Volcker Rule proposal. The heaviest influx of comments on the plan is expected shortly before Monday's deadline.

Many institutions that engage in proprietary trading and are either bank subsidiaries or get their financing from banks -- including insurance companies, hedge and venture capital funds, municipal bond brokers and financial investment firms -- wrote to the regulators, suggesting either that the proposal goes too far or wrongly overlooks subtle differences between the potentially risky businesses that the Volcker Rule was meant to rein in and the less risky business that wasn't meant to be affected. Trade associations also weighed in with a similar message.

"We suggest that the activities of non-bank affiliates of depository institutions be exempted from the requirements otherwise applicable to 'banking entities,' " said Wedbush Inc. The company called the proposed definition of a banking entity "overbroad," and "excessively burdensome," and warned it could sap the financial strength of depository institutions.

"The proposed rule would sweep up numerous entities whose activities have no adverse impact on any depository institution, in no way put in jeopardy depository accounts and not in any event be backstopped by depository insurance backed by taxpayers. Indeed many of these entities are engaged in entirely separate businesses," said the financial services and investment firm.

Earlier, foreign countries and foreign banks warned regulators that the favored treatment of U.S. sovereign debt under Dodd-Frank could have international implications.

Municipal bond brokers said the rule could eliminate "robust" market making and boost costs, particularly for public entities that aren't state or city governments.

Citigroup Global Markets Inc. said banks are the largest market makers for municipal securities and the rule could inadvertently create liquidity problems and increase costs. It suggested that although the proposal would allow banks to continue their proprietary activities on state and city bond issues, the exemption is too narrow and could cause problems when quasi-government bodies and other special entities issue bonds.

"If implemented [Volcker] would arbitrarily, unfairly and unnecessarily harm state and local government by raising costs in a significant segment of the municipal market that relies on securities to fund utility systems, infrastructure projects, affordable housing, universities and other non profit institutions," said Citigroup.

The Financial Services Roundtable said insurance companies with banking subsidiaries could be barred from investing in covered investment funds, investments commonly made to diversify portfolio holdings and boost returns.

The Roundtable also urged regulators to make clear that insurance companies -- even those that hold banks -- can sponsor variable annuities and be in compliance with the Volcker Rule.

The Committee of Annuity Insurers, expressing similar concerns, warned the that rule would have "a serious, adverse impact."

Venture capitalists and bank investors questioned whether rules prohibiting banks from making proprietary investments in "private equity funds" could also prevent them from making venture capital investments.

"We urge you either to conclude that 'private equity funds' do not include venture capital funds or that banks may sponsor and invest in venture capital funds as a "permitted activity," said Sofinova Ventures.

The National Venture Capital Association voiced similar concerns. "We encourage [regulators] to further refine their definition of a "covered fund" to prevent venture capital funds from being swept into the Volcker Rule," the group said.

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