FRB Vice Chairman Says Regulators Considering Volcker Rule Changes

Board of Governors of the Federal Reserve System (“FRB”) Vice Chairman for Supervision Randal K. Quarles reported that federal regulators are collaborating on a proposal to make “material changes to the Volcker Rule.” Speaking at the Institute of International Bankers Annual Washington Conference, Mr. Quarles asserted that certain Dodd-Frank regulations have caused compliance challenges and imposed unnecessary burdens on foreign banking organizations (“FBOs”).

Mr. Quarles argued that prior to the financial crisis, there was rapid growth of FBOs in the United States and insufficient regulation. He stated that certain post-Dodd-Frank regulatory requirements, particularly regarding the use of intermediate holding companies, had materially improved the quality of U.S. oversight. That said, Mr. Quarles characterized the Volcker Rule as an “example of a complex regulation that is not working well.”

Mr. Quarles said it was now possible to identify areas for improvement of the statute and the regulations. Mr. Quarles is seeking regulatory flexibility with regard to enhanced prudential standards for FBOs. He stressed the importance of tailoring standards to consider a firm’s actual risk profile, and vowed that the FRB will consider exceptions from certain requirements depending on a bank’s particular circumstances. He also committed to exploring solutions to tailor the rule and reduce burdens, particularly for firms that do not engage in proprietary trading and do not have large trading operations. Absent a statutory remedy, Mr. Quarles asserted, regulators will seek to make improvements by clarifying key terminology (such as “market making-related activity,” “proprietary trading” and “covered fund”). He shared that he expects regulators to explore solutions that will make exemptions more accessible for FBOs and foreign funds.

Lofchie Comment: In many respects, the tone of Vice Chair Quarles’ remarks is similar to previous remarks by CFTC Chair Giancarlo. Each has committed to a careful review of what is working and what is not, and to make improvements that are possible, while minimizing the likelihood of divisive political fights that are not worth the effort. That should provide wide latitude, given how much low-hanging fruit there is in improving on the existing Dodd-Frank regulations.