Volcker on the chopping block

There is mounting evidence that the Volcker Rule is on the verge of extinction after President Donald Trump signed an executive order instructing a review of banking regulations.

While the granular implications of Trump’s Friday move is yet to be clarified – it simply directs the Treasury Secretary to submit a report on recommended changes bank regulations within 120 days – officials say a review of the rule which restricts banks’ trading positions was among the seven principles the president has highlighted for change.

Trump’s nominee for Treasury Secretary, ex-Goldman Sachs partner Steven Mnuchin, has already said he would look to amend the rule, while a new piece of legislation which calls for its repeal, the Financial Choice Act, will be presented to the House in mid-February.

The rule, which caused a mass sell-off of private equity holdings by large banks, has long been criticised for its failure to define the difference between proprietary trading and market making, where trading firms hold out bids and offers across financial markets and hold short-term inventories of assets to accommodate transactions.

Dodd-Frank repeal unappealing

While the executive order signals intention to dismantle US financial regulation, sector sources say there is little support for scrapping the whole Dodd-Frank Act from an industry perspective. This would be too onerous considering it has already implemented many of the measures.

“A new rule that amends or deletes the act would require a significant amount of time. Many broker-dealers have already spent a lot of money implementing the act. It is not likely that they will undo these efforts, choosing to move forward with the current rule as a business decision,” Todd Cipperman of Cipperman Compliance Services told pfm.

Rather than a stable regulatory environment, financial services firms are forced to continually change policies and business models to adapt to politics, rather than business issues.

“Whatever the view of Dodd-Frank, is it better to just leave well enough alone and move on?” Cipperman said.

It would also be politically difficult to eliminate many of the regulations created by Dodd-Frank. Much of the act is legislative, so would require Congressional action, new laws and Democratic consent in the Senate, which is a slow and often cumbersome process.

“I do not think [Trump is] going to get 60 senators to vote to get rid of all this. I believe he’s going to appoint people who won’t enforce the law,” said Barney Frank, the ex-Massachusetts congressman who co-authored the Dodd-Frank Act, during a radio interview on Sunday.

This was a view shared by analysts at investment bank FBR. They said they expected regulators would be able to make a number of changes, especially on the enforcement of these rules, which could have a significant impact on the business models of banks and other financial services firms.

Peripheral changes, such as cutting compliance costs, freeing community and regional banks from the same rules as their larger peers and helping investment advisors are more widely anticipated.