Banks to Abide by Volcker Rule - Analyst Blog

By Zacks | August 22, 2012 AAA

In order to avert yet another financial crisis, the final version of the Volcker rule is expected to be released by U.S. regulators at the end of 2012, Reuters reported on Tuesday. This rule has been framed with the aim of reducing capital investments by banks in high-risk bets. Moreover, banks have to adhere to the new regulations as soon as they are introduced.

Volcker Rule - a specific section of the Dodd-Frank Wall Street Reform and Consumer Protection Act - requires banks to restrict their investments in hedge funds and private equity funds. The proposition of the rule demands trimming down of investments in each private equity and hedge fund to 3% or less of net asset value. Further, total investments in all such funds should not exceed 3% of Tier 1 capital. Moreover, proprietary trading is prohibited under this rule.

U.S. regulators working on the rule include the Federal Reserve, the Securities and Exchange Commission, Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency.  These agencies are working hard to implement the rule and aims to steer banks to completely obey the rule by July 2014.

Previously, the rule was expected to be implemented on July 21, 2012. However, it was delayed as the agencies differed over the process of implementation of the rule. Moreover, different viewpoints from industry groups and the public have been received in reponse. Therefore, officials are working to resolve the issue and publicly present a clearer picture of the rules as soon as possible.

Further, the shares of Wall Street Biggies such as The Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), JPMorgan Chase & Co. (JPM), Citigroup Inc. C) and Bank of America Corp. (BAC) are suffering, owing to the uncertainty related to the Volcker rule.

Overall, we believe that until there is ambiguity surrounding the rule, investors will have a dim outlook on banks. They will expect the bottom line to be pressurized owing to the negative effect of the rule on banks.
 

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