The Volcker rule will cost U.S. national banks about $1 billion for compliance and capital, according to a government estimate. Part of the Dodd-Frank Act meant to ban proprietary trading and limit hedge-fund investments, the Volcker rule was proposed by the Federal Reserve, Federal Deposit Insurance Corp., and two other regulators this month, and is expected to result in $917 million in capital costs for banks, according to a September 7 impact analysis by the Office of the Comptroller of the Currency.
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The OCC’s analysis also showed that 2,096 national banks would have annual legal and compliance costs of about $50 million under Dodd-Frank, which bans banks from having more than 3% of their Tier 1 capital invested in hedge and private equity funds and requires them to deduct their aggregate investments in the funds form their Tier 1 capital.
Under the act, 152 national banks may have a combined maximum investment in funds of $18.3 billion, according to the OCC.The estimated cost of capital would be 5%, or a maximum overall cost of $917 million. A national bank is a commercial bank with a charter from the OCC, considered part of the Federal Reserve System and belonging to the FDIC.
The OCC’s analysis was produced under a 1995 law requiring some agencies to product impact statements before publishing a rule that could cost the private sector $100 million or more in annual expenditures. According to the OCC estimate, the Volcker rule’s impact is technically $50 million — the capital costs required by the Dodd-Frank law are considered separate from the cost of the regulation implementing it.
Moody’s Investors Service says that rule will be a “credit negative” for bondholders of Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS). Banks’ fixed-income desks could see revenue fall as much as 25% as a result of the proposal. The Volcker rule will affect banks’ standalone proprietary trading desks and trading for their own accounts conducted elsewhere in the companies.
Between June 2006 and the end of 2010, the standalone proprietary-trading groups at six bank holding companies, including Bank of America, JPMorgan (NYSE:JPM), Citigroup, Wells Fargo (NYSE:WFC), Goldman Sachs, and Morgan Stanley, had a net loss of about $221 million. “Compared to these firms’ overall revenues, their standalone proprietary trading generally produced small revenues in most quarters and some larger losses during the financial crisis,” according to a Government Accountability Office report.