The so-called Volcker Rule, a provision in the 2010 Dodd-Frank financial-reform law that would ban banks from making risky bets with their own money, was supposed to be ready in 2011. And the federal government did release a lengthy proposal laden with hundreds of questions from Wall Street and chased by thousands of comment letters. Then, the final rule was supposed to be ready in 2012. Now it's supposed to be ready in 2013. "I think that it's close," Mary Miller, the Treasury Department's undersecretary for domestic finance, said last week. Meanwhile, regulators have come and gone in the agencies writing the rule. What, exactly, is the holdup?
The biggest problem hasn't been the difficulty of defining which trades are permissible under the Dodd-Frank statute. (Hedging and market-making — in which a firm says it will buy and sell stocks at a given price — are OK; making risky bets for profit, known as "proprietary trading," is not. The line between them, Wall Street and regulators argue, is fuzzy.) The problem hasn't even been the stupefying amount of work Dodd-Frank handed to regulators, who must devise 398 rules, according to law firm Davis Polk & Wardwell, without giving all the relevant agencies enough of a funding boost for the job. Three years in, and they're still only 40 percent there.
No, say Wall Street and former Washington officials: The biggest problem may be the cultural gaps between the five agencies charged with writing the Volcker Rule. It's not the first time regulators have had to work together, but such collaboration — particularly between banking cops and market cops — was less frequent before Dodd-Frank. It is expected to become more common, and the Volcker Rule experience suggests that it won't be easy.
The Dodd-Frank statute convenes the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Together, they are meant to write the rule, named for Paul Volcker, the former Fed chairman and a reform advocate. That means they've got to get everyone on board, and any agency can hold up the process over any point. This has produced frustrating delays, Volcker said at a conference in March. "How many times people told me six months ago, 'It'll be two weeks, Paul! We're going to get the regulation out. It looks like it's right there.' Doesn't happen," he said. "Two months later, 'Well, before the end of December.' 'Well, before the end of January.' You cannot operate an effective regulatory system this way."
The greatest cultural divide is between the three banking regulators (the Fed, the FDIC, and the OCC) on one side and the two market regulators (the SEC and the CFTC) on the other. The banking types have historically worked confidentially to examine institutions' practices and correct them when they're out of line; these officials cooperate and even embed staff at the banks themselves, so it stands to reason they prefer flexibility on this rule and other parts of financial-regulatory reform, say former officials and financial-regulation experts who asked to speak anonymously in order to generalize. The market regulators, on the other hand, are focused on investor protection and disclosure; they like to draw bright, easily enforceable lines, the officials say.
Dodd-Frank asks regulators from both sides to draw this line together in 58 different places, most notably the Volcker Rule and a risk-retention provision related to mortgages, which convenes the OCC, the Fed, the FDIC, the SEC, the Federal Housing Finance Agency, and the Housing and Urban Development Department. As with the Volcker provision, those agencies released their first proposal in 2011 but have yet to finalize anything.
The banking regulators have experience working together. David Barr, a spokesman for the FDIC, said it was "very common" for the FDIC, the Fed, and the OCC to work together on joint rules, even before Dodd-Frank. He points to the Federal Financial Institutions Examination Council, a government organization created in 1978 with a mission to "make recommendations to promote uniformity in the supervision of financial institutions." The SEC and the CFTC have also collaborated before, issuing a joint rulemaking under the Commodity Futures Modernization Act of 2000, for example.
The bigger shift is the one that requires banking and market regulators to work together. This isn't the first time they've had to do so, and it didn't go very well last time: In Gramm-Leach-Bliley, the 1999 banking law, the SEC was required to write exemptions for banks defined as "brokers" by the Securities Exchange Act of 1934. A turf war with the Fed led to another law requiring the two agencies to issue joint rules. Overall, the process took eight years.
Such joint work is expected to accelerate under Dodd-Frank and beyond. "The regulatory system is sort of back in the days of Glass-Steagall [the 1933 law that banned commercial banks from the investment business], where we have our market regulator over here and our bank regulator over there, and the assumption [that] the businesses are very different. But, in fact, they've interpenetrated a lot," says Marcus Stanley, policy director at the pro-reform group Americans for Financial Reform. To oversee modern financial markets, this interagency collaboration is a necessary development, he says.
Whether the cultural coming-together will muddle the final Volcker Rule is unknown; regulators have been secretive about the details. But the 298-page proposal released in October 2011 didn't assuage that fear (Volcker dryly referred to it as "not a masterpiece of clarity"). Reform advocates worry that a sprawling, complex rule would be harder to enforce and easier for banks to sidestep. But that could be the inevitable result of an interagency compromise.