In its latest analysis, the Office of the Comptroller of the Currency estimates that the cost of the Volcker Rule for financial services firms will range widely from $413 million to $4.3 billion. In return, the industry may get a Holy Grail of transparency via “required metrics reporting, reduced conflicts of interests, improved safety and soundness, and reduced systemic risk.”
As you may recall, the key provisions of the Volcker Rule, which is still a work in progress despite its approval by regulators late last year, are that a banking entity cannot engage in proprietary trading and cannot acquire or retain equity, pursue a partnership or secure ownership interest in or sponsorship of a hedge fund or a private equity fund. The Volcker Rule also requires banking entities to “establish comprehensive programmatic compliance and data reporting regimes,” as the OCC reminds. These provisions are likely to survive the interpretation process that the Volcker Rule faces.
A further drill down reveals that the OCC foresees compliance and reporting requirements ranging from $402 million to $541 million per institution, depending upon its size and the instruments that are part of its trading portfolio. OCC officials also predict that the costs associated with estimated capital deductions via those fleeting hedge and private equity funds will range between $147 million and $165 million. There will also be unspecified “additional OCC-supervision costs,” that will add another $10 million to the economic impact of the Volcker Rule.
“The vast majority of this impact will be borne by large banks with assets greater than $10 billion,” according to the OCC report, which adds that the final rule will not have “a significant economic impact” upon many small OCC-supervised entities.
“However, we estimate that up to seven smaller banks will be affected,” OCC officials caution in the report. In a tantalizing bit, the OCC states that of the 1,291 small banks it’s been watching as of Dec.31, 2012, “up to seven of these small banks will have a significant impact, defined as total costs in a single year that are greater than 5 percent of total salaries and benefits, or greater than 2.5 percent of total non-interest expenses.” The identities of these Seven Unlucky Sisters will not be revealed.
Like a mantra, the report repeatedly acknowledges that the Volcker Rule will put the industry into uncharted territory.
“The range of our cost estimate reflects the uncertainty of the final rule’s impact on the market value of banks’ investments in impermissible covered funds, primarily on banks holding certain impermissible CDO [collateralized debt obligation] and CLO [collateralized loan obligation] assets,” according to the OCC report. “The potential impact of decreased demand on the market value of these assets is between zero and $3.6 billion. The OCC estimates there are approximately 46 OCC-supervised banking entities with assets greater than $10 billion that will be required to report metrics, establish an enhanced compliance program, or establish a core compliance program.”
It would be great to see that list of 46 banking entities. That would real transparency.
Underscoring the uncertainty, the OCC acknowledges that its estimate “does not capture some costs that are quantifiable but difficult to estimate, such as indirect costs due to decreased market liquidity and the impact this decrease in liquidity may have on the market value of some assets and the cost to corporations of issuing debt.”
As detailed as the report is (24 lovely pages), the OCC and others in positions of authority have not yet addressed the tricky question of whether the Volcker Rule is worth such a painful and expensive ride to transparency.
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