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June 25, 2020

Latest Weakening of Volcker Rule Re Covered Funds Creates Multiple Loopholes, Endangers Financial Stability and Makes Bailouts More Likely

Thursday, June 25, 2020
Contact: Pamela Russell at 202-618-6433 or
Washington, D.C.  –  Joseph R. Cisewski, Senior Derivatives Consultant and Special Counsel for Better Markets, issued the following statement with respect to the Federal Deposit Insurance Corporation’s (FDIC) final rulemaking to amend the Volcker Rule’s covered funds provisions:
“The Volcker Rule was intended to dramatically reduce the short-term, high-risk, socially useless, speculative proprietary trading by Wall Street’s too-big-to-fail, taxpayer-backed banks. Since its implementation five years ago, it has, on balance, helped prevent another catastrophic financial crash, reduced the likelihood of future taxpayer bailouts, and constrained the bonus-driven trading culture that too often infected the largest Wall Street banks’ activities and warped priorities in the years leading up to the 2008 financial crisis.
“Because only Wall Street’s handful of biggest banks have the balance sheet capacity to engage in significant ‘prop’ trading, the Volcker Rule primarily impacts Wall Street’s too-big-to-fail banks, all of which had to be directly or indirectly bailed out in 2008-2009. That was because at the same time those banks were hemorrhaging money due to subprime and derivatives losses, they were also losing money from prop trading in other types of asset classes and instruments. For example, Morgan Stanley lost more than $9 billion on a single ‘prop trade’ essentially at the same time it was taking enormous subprime write offs.
“That’s why the Volcker Rule prohibits both direct, inside-of-the-bank prop trading and indirect, outside-of-the-bank prop trading via ‘investments’ in hedge funds and other similar types of private funds. These are called ‘covered funds’ because they are supposed to be ‘covered’ by the Volcker Rule, preventing banks from doing indirectly that which they are prohibited from doing directly. 
“Nevertheless, the FDIC just finalized new covered funds ‘exclusions,” which are likely little more than loopholes that, in essence, will enable banks to do an end run around the Volcker Rule. These actions come on top of the de facto repeal of other Volcker Rule provisions earlier this year, which weakened the direct prop trading prohibition provisions related to market-making, underwriting, hedging and other exemptions. Those earlier changes made meaningful oversight of banks relying on these exemptions next to impossible, as detailed in this fact sheet.
“Now, the FDIC has set the stage to turn the Volcker Rule into the regulatory equivalent of a Potemkin Village. The rule remains in theory. In practice, however, multiple new exclusions and expanded existing exclusions will place far too many of the speculative activities of taxpayer-backed Wall Street banks beyond the reach of the Volcker Rule, as detailed in our comment letter and fact sheet.  Of course, that has always been the purpose of the covered funds amendments, as multiple dissenting appointees at the FDIC, CFTC, Securities and Exchange Commission, and Board of Governors of the Federal Reserve System essentially pointed out when the exclusions were proposed.  
“The timing of these changes could not be worse. These latest loopholes will only increase risks in the banking system and divert resources from the lending activities banks should be prioritizing to deal with the pandemic-caused economic downturn.”
Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit  
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