Fed offers five-year Volcker compliance lifeline

Banks that are having difficulty selling off illiquid assets to comply with the Volcker Rule can apply for an extension.

Banks will be able to apply for an extension of up to five years to conform with the Volcker Rule, provided they demonstrate a good-faith effort to comply in time with the existing July 2017 deadline, the US Federal Reserve said on Monday.

Most financial institutions that are finding it difficult to divest their illiquid fund holdings – which can only represent 3 percent of tier 1 capital under the rule – should be granted an extension, provided they demonstrate they made an effort to meet the requirements within deadline, the Fed said in a statement.

To qualify, they will have to submit details on the funds for which they are seeking extensions, along with details on the efforts they made to comply. They will also have to say how much more time they need.

It is the final grace period the Fed can grant, following three previous one-year extensions, it said.

Financial institutions were active sellers in the years after the announcement of the Volcker rule and accounted for as much as a quarter of 2014 deal volume, though this figure dropped to 18 percent last year according to a report by advisory firm Setter Capital. They had been expected to return as sellers this year to comply with Volcker’s July 2017 deadline and were predicted to account for 14 percent of deal volume in the second half of the year, according to Setter’s report.

The rule, which is part of the 2010 Dodd-Frank Wall Street reform, is intended to keep banks from speculating with their customers’ money, and limits the amount of capital they can invest in private equity and hedge funds.

It is uncertain whether the rule will remain in place for long, as various pieces of legislation that will impact it are passing through the US legal system. The Financial Choice Act, which calls for it to be scrapped, will soon be voted on in the Senate.

A hearing on a second act, the Financial Regulatory Improvement Act, has been held by the House banking committee. This act would exempt banks with less than $10 billion in assets from the rule.