Dodd-Frank, Volcker Rule Speculation Reaches Fever Pitch in 2013

The fate of Dodd-Frank and the much debated Volcker Rule are being reconsidered amidst further “fiscal cliff” talks and the arrival of a new Congress.

Dodd-Frank Modified?

The angle taken by The Washington Post suggests that Dodd-Frank could be modified in 2013. This argument suggests that modification could be a bipartisan process: “Rhetoric has softened and bipartisan alliances have formed, leading some analysts to anticipate that meaningful legislation will be on the agenda next year,” said Danielle Douglas of the Post.

Douglas taps into the possibility of bipartisan support for a bill that would rein in big banks:

The bill, sponsored by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), asks the agency to study whether institutions with more than $500 billion in assets enjoy favorable pricing of their debt because of inflated credit ratings built on the perception that the government will always step in to prevent their collapse. It’s unclear whether the House will take up the bill before the end of the session, but advocates of reform are encouraged by the broad support in the Senate.

Brown and Vitter are part of a small but growing group of Democrats and Republicans interested in exploring whether the nation’s largest banks need to be downsized to protect financial stability. Analysts say the addition of Sen. Elizabeth Warren (D-Mass.), the architect of the Consumer Financial Protection Bureau, to the Senate Banking Committee will strengthen the coalition.

Fate of Volcker Rule

Meanwhile, speculation on the fate of the Volcker Rule grows daily. A new Financial Times editorial suggests that the Volcker Rule will be finalized this year, although implementation could be blocked until 2015:

In October 2011 regulators released a complex and controversial 298-page proposal to implement the statutory “Volcker Rule” restrictions on proprietary trading and relationships with hedge funds and private equity funds. There has been very little public movement since, even though the statutory Volcker Rule came into effect last July. However, behind the scenes, regulator discourse has been active and fruitful. We expect the result to be a final Volcker Rule in the first half of the year, largely consistent but with the potential for different treatment of different types of entities.

Congress included in the statutory Volcker Rule a “conformance period” for institutions to come into compliance with it. This conformance period, originally expected to be at least two years, ends in July 2014. Given the delay in final regulations, we predict that the Federal Reserve will push the end of the conformance period until at least July 2015.

Simon Johnson, however, writing from the New York Times, undercuts any sense of bipartisan agreement by noting recent attempts to reverse or repeal the Volcker Rule. Johnson cites a letter from the U.S. Chamber of Commerce to the U.S. Trade Representative:

The Volcker Rule is discriminatory, as foreign sovereign debt is subject to the regulation, while Unted States Treasury debt instruments are exempt. This creates a discord in G20 and invites foreign governments to retaliate at a time when we need those same regulators in foreign countries to support initiatives to liberalize trade in financial services. Further, U.S.T.R. should conduct a very close examination to ensure the Volcker Rule does not violate any of our trade obligations.

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