The incoming Chair of the House Financial Services Committee urged federal financial regulators to interpret the Volcker provisions of the Dodd-Frank Act in a way that does not disadvantage US financial firms in competition with EU firms. In a letter to the Financial Stability Oversight Council, Rep. Spencer Bachus (R-AL), currently the committee’s Ranking Member, said that any Volcker Rule regulations adopted by US financial regulators must be set against the international regulatory framework so as not to foster regulatory arbitrage and not unfairly impact US financial firms. The Volcker regulations must also take into account how trading activities fit into the core business plan of global financial firms as well as the consequences for US firms of prohibiting proprietary trading activities in the US while such trading activities continue everywhere else in the world.
In the view of Rep. Bachus, the Volcker provisions collide with the European universal banking model that the EU is highly unlikely to abandon in the spirit of regulatory harmonization. European Central Bank Members have noted that the Volcker Rule is incompatible with the universal banking model, which allows all banks to offer all banking services, and could even have the unintended consequence of banning activities that might mitigate risk
Given the City of London’s significance as a world financial center, noted Rep. Bachus, the UK’s failure to adopt the Volcker provisions would result in a significant competitive disadvantage for US firms. To date, the UK’s reaction to the Volcker provisions has been mixed. While current Chancellor George Osborne said that large scale proprietary trading and large scale internal hedge funds do not sit easily alongside retail banking, the current UK government has taken no steps to implement the Volcker rule. Rather, the Chancellor has appointed an independent commission to study the matter and report back in 2011.Rep. Bachus does not believe that the UK will ever adopt the Volcker provisions. He noted that prior Chancellor Alistair Darling questioned whether the Volcker Rules could ever be effective in a global financial marketplace.
Recognizing the strong international resistance to the Volcker provisions, Rep. Bachus offered an amendment to the Dodd-Frank Act during the House-Senate conference committee that would have conditioned implementation of the provisions on their first being accepted by a majority of G-20 countries. Although the committee rejected the proposed amendment, Chairman Frank directed the Obama Administration to submit a letter to the conferees addressing the potential competitive consequences of unilateral US adoption of the Volcker Rule.
In the view of Rep. Bachus, the response from Treasury Secretary Tim Geithner offered only vague assurances that the Administration would continue to encourage its international partners to advance similar prudential objectives as those embodied in the Volcker Rule. Treasury cautioned that it would be unrealistic to expect full financial regulatory harmonization given differing global financial systems and legal traditions.
According to Rep. Bachus, any doubt over whether other jurisdictions would follow Dodd-Frank’s Volcker precepts were laid to rest a month after the Geithner letter when Fed Governor Daniel Tarullo, the Fed’s point person on global coordination of US financial regulations, told the Senate Banking Committee that there are aspects of the Dodd-Frank Act that are unlikely to become part of the international financial regulatory framework. For example, the act generally prohibits U.S. firms and the U.S. operations of foreign firms from engaging in proprietary trading and from investing in or sponsoring private investment funds. These provisions conflict with the universal banking model, he noted, which is unlikely to be changed to accommodate the Volcker Rule.