Volcker Rule Will Cost U.S. Banks $1 Billion

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.

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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.