Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, on Thursday sided with top regulators in saying they were unlikely to complete the Volcker Rule by its summer deadline."It is not clear at all that we will make the July deadline given the complexities," Plosser told reporters following a speech before the National Economist Club.
Both Federal Reserve Board Chairman Ben Bernanke and Fed Gov. Daniel Tarullo have signaled that regulators would be late in delivering a final rule to Congress, which will bar banks from proprietary trading and limit their investments in private-equity and hedge funds.
Dodd-Frank required regulators to finish the rule, named after former Fed Chairman Paul Volcker, by its two-year anniversary, but a proposal issued last year has drawn significant criticism.
The Fed has received close to 17,500 comments on the rule, which is opposed by many banks and even some foreign governments.
In the securitization industry, the American Securitization Forum back in mid-March submitted a letter urging regulators to delay the Volcker Rule's implementation. For ASR's coverage of this issue, please click this link.
The Volcker Rule generally bans any banking entityfrom acquiring or retaining ownership interest in — or even sponsoring — a hedge fund or private-equity fund. It also does not allow financial institutions from entering into “covered transactions” under the Federal Reserve Act Section 23A. These transactions cover loans, guarantees or purchases of securities or assets with any hedge fund or private-equity fund for which it serves as sponsor, investment manager or investment adviser. It also prohibits these firms from engaging in proprietary trading.
Despite the securitization exclusion and the Financial Stability Oversight Council study recommendations not to cover securitization, the regulators did not exclude ABS issuers from the proposed rules’ definition of “covered funds.”
More generally, much of the criticism centers around exceptions for the rule. Under the statute, banks are permitted to engage in certain kinds of trades, such as those for market making activities. But regulators have struggled with defining those exceptions.Plosser said it's still unclear how regulators will address the number of issues raised by various stakeholders.
"I don't know what the final outcome is going to be," Plosser said. "I don't know the answer to that. I don't know anybody that does."
Plosser said the thousands of questions posed by regulators in the draft rule released in October "just goes to show you just how difficult this is."
"I think many regulators, not just the Fed, and many bankers said that writing the rules for the Volcker Rule was going to be tricky — was going to be difficult," said Plosser. "Either that or they were going to be so vague that it wouldn't provide much guidance. I think that's proven to be the case."
Still, regulators are committed to doing the best job, he said.
"We have a responsibility to write rules that are consistent with the statute and we're going to try our very best to do that in a fair and balanced way as we know how," Plosser said.
Separately, he said the housing market is a "very difficult problem" that would continue to persist for a while.
"I don't think it's going to be contributing much to the recovery over the next couple of years at least," he said.
Plosser declined to say whether a tool such as principal reduction, which has been heavily debated, would be beneficial to the housing recovery.
"I think principal reduction is a fiscal policy decision. I don't think that's the purview of the Fed, so I don't really want to get into an argument about specific fiscal policy decisions that Congress may or may not make," he said