With Republican victory in 2016, and the Trump transition teams’ vow to “dismantle” Dodd-Frank, one regulatory provision that is in Republican crosshairs is the Volcker Rule.  However, targeting the Volcker Rule does not square with the Republican campaign promise to create a new Glass-Steagall.

The history of the rule

Republicans have been opposing the Volcker Rule since its inception[1]. With Trump in office, and Republican control of the Senate and Congress, the rule’s demise seems all but certain. Still, with a return of Glass-Steagall in the Republican 2016 platform, things may not be so simple.[2]

 

The Volcker Rule was enacted as part of the Dodd-Frank reforms of 2010. It was passed with the purpose of reducing conflicts of interest and ensuring bank stability by limiting activities which could cause undue risk or loss.[3] It limits the ability of U.S. depository institutions from engaging in proprietary trading, or having any ownership interest in a hedge fund or private equity fund.[4]  For the purposes of this rule, proprietary trading means engaging as a principal for the trading account of the relevant entity in any transaction to purchase or sell, or otherwise acquire or dispose of, various financial instruments.[5]

 

Glass-Steagall was a financial regulatory law passed in 1933 in the fall out of the Great Depression. Its core provision separated commercial banking from investment banking. The purpose was to prevent bank runs and cut down on speculative trading.[6] Glass-Steagall was repealed over time, having its provisions cut back between the 70s and the 90s, until its final repeal with passage of the Gram-Leach-Bliley Act in 1999.[7] While most analysts agree that the repeal of Glass-Steagall did not cause the 2008 recession on its own, many believe that it played some role in exacerbating it.[8]

 

To many, a new form of Glass-Steagall seems like a more burdensome way of accomplishing several of the same protections that Volcker already has in place. For that reason, many analysts believe that calls for a new Glass-Steagall are more political posturing than a call for new legislation, and that Republicans will instead focus efforts in lessening the controls under the Volcker Rule.

glass-st-1

Why the Pivot?

Many analysts believe that Trump’s calls for a new Glass-Steagall were more politics than policy. They argue that Trump used the introduction of a new Glass-Steagall as a ploy to distinguish himself from both his fellow Republicans and Hillary Clinton. Throughout the presidential race Clinton was attacked for her purported close ties to Wall Street.[9] Analysts feel that, by espousing a belief in a new Glass-Steagall, Trump was signaling that he was determined to truly take a hard line against banks.

 

However, in reality, a new Glass-Steagall would be highly disruptive to the financial services industry. Among other things, it would cause a break up of several very large Banks including JPMorgan Chase & Co. and Citigroup. For a President, whose primary goal is revitalizing the economy, it is unlikely that he would introduce a law that would cause massive uncertainty and financial instability. It is even more unlikely that a primarily Republican Congress would pass such a law.

volck-1Republicans have had the Volcker Rule squarely in their sites for years. Jeb Hensarling’s Financial CHOICE Act calls for a complete repeal of the Volcker Rule.[10] Additionally, Trump’s pick for the new Treasury Secretary Steven Mnuchin is a strong opponent of the Rule.[11] Republicans dislike the Volcker Rule because they feel like it impedes upon legitimate activity and unnecessarily precludes certain types of transactions. Republicans argue that Volcker, as it stands, disrupts legitimate financial functions, such as intermittent market making activity, with its provisions.  They also feel that the Volcker Rule serves to decrease liquidity, and wipe out certain financial products altogether. Additionally, Republicans do not see proprietary trading as the actual cause of the financial recession.[12]

The Likelihood of Change

Despite the intentions of Trump’s administration, without a Republican supermajority in the Senate it would be difficult to pass a law repealing Volcker. Democrats in Congress will approach any attempts to change the Volcker Rule with a scorched earth filibuster. Similarly, the law mandates most of its regulatory requirements making it difficult to change the rules through administrative and executive fiat.

 

Still, Republicans will change some of the provisions of the Volcker Rule to loosen requirements. Moreover, Republicans will look to administrative methods of punching holes in the wall. Trump may also rely on a mixture of regulatory changes and enforcement changes to give banks more latitude and lessen the burdens of the Volcker Rule. For example, Republicans can slow down enforcement of the law, giving the financial services industry more leeway to enter the gray areas of the law without worrying about administrative repercussions.[13]

[1] https://www.ft.com/content/bd48b836-4cce-11df-9977-00144feab49a

[2] http://www.bloomberg.com/politics/articles/2016-07-18/republican-platform-under-trump-backs-glass-steagall-s-return

[3] Dombalagian, Onnig, The Expressive Synergies of the Volcker Rule, 54 B.C.L. Rev. 469 (2013),

http://lawdigitalcommons.bc.edu/bclr/vol54/iss2/3

[4] Dombalagian, (2013)

[5] Dombalagian, (2013)

[6] http://www.federalreservehistory.org/Events/DetailView/25

[7] http://cepr.net/documents/publications/dereg-timeline-2009-07.pdf

[8] http://www.huffingtonpost.com/dennis-m-kelleher/the-lessons-of-repealing-glass-steagall_b_8532666.html

[9] http://www.americanbanker.com/news/law-regulation/trump-is-unlikely-to-bring-back-glass-steagall-1092394-1.html

[10] http://financialservices.house.gov/uploadedfiles/financial_choice_act-_executive_summary.pdf

[11] http://www.wsj.com/articles/trump-treasury-choice-steven-mnuchin-vows-to-strip-back-dodd-frank-1480513188

[12] https://www.washingtonpost.com/news/wonk/wp/2013/12/10/there-are-six-main-arguments-against-the-volcker-rule-heres-why-theyre-wrong/?utm_term=.50cae662b2b4

[13] https://www.bloomberg.com/gadfly/articles/2016-11-11/goldman-s-slow-volcker-compliance-could-pay-off