Mr. Volcker also called on Congress to strengthen the mandate of the Financial Stability Oversight Council so that the Council can effectively harmonize the regulations of the SEC, CFTC, the Fed and its other constituent members. He emphasized the importance of the simultaneous and uniform regulatory implementation of Section 619 of the Dodd-Frank Act, popularly known as the Volcker Rule, prohibiting retail FDIC-insured banks from proprietary trading and the sponsoring hedge funds. The FSOC, while a step in right direction, needs a much stronger mandate from Congress to be effective. He added that much of the regulatory implementation of the Dodd-Frank Act is in limbo. A major reason for this situation, he believes, is the involvement of too many regulators with overlapping responsibilities, differing priorities, differing governance, and a zealous maintaining of their turf.
The former Fed Chair emphasized that the final Volcker Rule regulations should be uniform for all covered financial institutions. However, the relevant regulating agencies have overlapping responsibilities, idiosyncratic ideas of their own, and differing approaches. Thus, there is a stalemate or a retreat to an unsatisfactory common denominator.
The Chairman said that the Volcker Rule, when fully implemented, will move speculative capital out of banks to hedge funds and private equity funds, which is where it should be. He was somewhat skeptical of the U.K. legislative approach of ring-fencing retail banks to create a pure and simple commercial bank and pushing out proprietary trading and the sponsoring of hedge funds to an investment bank within the same holding company, noting that this approach will be ``hard to pull off.’’
Chairman Volcker also emphasized the importance of enhancing the regulation of money market funds, which have operated as an invasive exotic hybrid, somewhere between a mutual fund and a deposit taking commercial bank. They flourish outside of banking and mutual fund regulations, he said.
Given their vulnerability to runs during the financial crisis, he added, it is widely recognized that money market funds present a structural weakness in the financial system. There are a number of plausible reform alternatives being offered for money market funds. In the Chairman’s view, The most direct option is to say that they are mutual funds and that their assets should be marked to market every day, which could be done without the need to enact legislation. Mr. Volcker expressed his frustration that the relevant regulators seem unable to act, even at the urging of the FSOC.