The U.S. Federal Reserve is considering a delay in implementation of the Volcker Rule limiting banks’ proprietary trading amid concerns that banks will suffer losses if they have to dump private equity investments by the current July 2015 deadline.
The Volcker Rule, one of the more controversial components of the Dodd-Frank reforms of Wall Street, restricts banks from investing in private equity as part of a ban on making market bets with their own capital.
According to Bloomberg, Wall Street has been lobbying to extend the compliance deadline to 2022, which would allow banks to avoid having to accept discount prices for their holdings. Goldman Sachs currently has $7 billion invested in private equity while Morgan Stanley has $2.5 billion.
“There’s considerable pressure the Fed is feeling in that they don’t want institutions to have a bloodbath trying to divest funds,” Kevin Petrasic, a partner at Paul Hastings LLP, told Bloomberg. “The Fed has been indicating flexibility.”
In a speech last week, Fed General Counsel Scott Alvarez said the central bank is considering whether to extend the Volcker Rule deadline and change “metrics” used in the regulation.
“Our greatest challenge for the next year is the Volcker rule,” he told the American Bar Association conference. “We are already seeing some things that we probably will change,” he added.
Bloomberg noted that the deadline “underscores the tension regulators face between enforcing rules meant to curb risk-taking and responding to banks’ complaints that many Dodd-Frank Act reforms aren’t workable. The Fed is deciding what to do after lawmakers lambasted it at congressional hearings last month for weak oversight of Wall Street.”
The banks’ private equity investments were made before the 2008 financial crisis. Acknowledging they would need time to divest holdings, Congress authorized the Fed to put off the deadline for several years.
Sen. Sherrod Brown, an Ohio Democrat who helped write Dodd-Frank, told Bloomberg it was time for banks to stop dragging their feet. Wall Street says it’s too complicated, even though “they made it that way,” he said.
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