Statement by Martin J. Gruenberg
Member, FDIC Board of Directors
The Volcker Rule
August 20, 2019
The final rule before the FDIC Board today would effectively undo the Volcker Rule
prohibition on proprietary trading by severely narrowing the scope of financial instruments
subject to the Volcker Rule. It would thereby allow the largest, most systemically important
banks and bank holding companies to engage in speculative proprietary trading funded with
FDIC-insured deposits. For that reason I will vote against this final rule.
Section 619 of the Dodd-Frank Act, known as the Volcker Rule, prohibits propriety
trading in banks and bank holding companies. The Act defines proprietary trading as engaging as
a principal for the trading account of a bank or bank holding company. The Act in turn defines
trading account as any account used for acquiring or taking positions in financial instruments
“principally for the purpose of selling in the near term (or otherwise with the intent to resell in
order to profit from short-term price movements)”, and any such other accounts as the
appropriate federal agencies may, by rule, determine.
The definition of trading account thus determines the scope of financial instruments
subject to the Volcker Rule prohibition on proprietary trading.
The current rule implementing the Volcker Rule was adopted by the federal financial
regulatory agencies in 2013. The definition of trading account in the current rule encompasses all
categories of financial instruments that are subject to fair value accounting regardless of how
they are reported on bank financial statements because they may be freely traded.
The 2013 current rule recognized that proprietary trading occurs not only in financial
instruments reported on the bank’s balance sheet as “trading assets and liabilities”, but in the
accounts also denoted as available for sale (AFS), in equities held at fair value, and in derivatives
not held for trading. The Notice of Proposed Rulemaking (NPR) adopted by the agencies in 2018
to make changes in the Volcker Rule included a definition of trading account that also captured
all of these fair valued financial instruments.
The final rule before the FDIC Board today includes within the definition of trading
account only one of these categories of fair valued financial instruments – those reported on the
bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of
financial instruments subject to the Volcker Rule.
Member, FDIC Board of Directors
The Volcker Rule
August 20, 2019
The final rule before the FDIC Board today would effectively undo the Volcker Rule
prohibition on proprietary trading by severely narrowing the scope of financial instruments
subject to the Volcker Rule. It would thereby allow the largest, most systemically important
banks and bank holding companies to engage in speculative proprietary trading funded with
FDIC-insured deposits. For that reason I will vote against this final rule.
Section 619 of the Dodd-Frank Act, known as the Volcker Rule, prohibits propriety
trading in banks and bank holding companies. The Act defines proprietary trading as engaging as
a principal for the trading account of a bank or bank holding company. The Act in turn defines
trading account as any account used for acquiring or taking positions in financial instruments
“principally for the purpose of selling in the near term (or otherwise with the intent to resell in
order to profit from short-term price movements)”, and any such other accounts as the
appropriate federal agencies may, by rule, determine.
The definition of trading account thus determines the scope of financial instruments
subject to the Volcker Rule prohibition on proprietary trading.
The current rule implementing the Volcker Rule was adopted by the federal financial
regulatory agencies in 2013. The definition of trading account in the current rule encompasses all
categories of financial instruments that are subject to fair value accounting regardless of how
they are reported on bank financial statements because they may be freely traded.
The 2013 current rule recognized that proprietary trading occurs not only in financial
instruments reported on the bank’s balance sheet as “trading assets and liabilities”, but in the
accounts also denoted as available for sale (AFS), in equities held at fair value, and in derivatives
not held for trading. The Notice of Proposed Rulemaking (NPR) adopted by the agencies in 2018
to make changes in the Volcker Rule included a definition of trading account that also captured
all of these fair valued financial instruments.
The final rule before the FDIC Board today includes within the definition of trading
account only one of these categories of fair valued financial instruments – those reported on the
bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of
financial instruments subject to the Volcker Rule.
2
The chart demonstrates clearly the impact of the final rule before the FDIC Board today
as compared to the 2013 current rule and the 2018 NPR.
At the holding company level, based on publicly available Y-9C data as of year-end
2018, the 2013 current rule and the 2018 NPR capture within the definition of trading account
for purposes of the Volcker Rule over $2.4 trillion of financial instruments.
The final rule before the FDIC Board today, because of its narrower definition of trading
account, captures over $1.8 trillion of financial instruments for purposes of the Volcker Rule.
Thus, at the holding company level, about 25 percent of the financial instruments subject to the
2013 current rule and the 2018 NPR would no longer be subject to the prohibition on proprietary
trading.
At the bank level, based on publicly available Call Report data as of year-end 2018, the
impact of the final rule would be far more severe. Under the 2013 current rule and the 2018
NPR, a total of nearly $1.2 trillion of financial instruments would be subject to the Volcker Rule
prohibition on proprietary trading at the bank level. Under the final rule before the Board today,
$635 billion of financial instruments would be subject to the Volcker Rule. In other words, at the
bank level, the final rule would exclude about 46 percent - nearly half - of financial instruments
from the Volcker Rule that are subject under the 2013 current rule and the 2018 NPR.
The chart demonstrates clearly the impact of the final rule before the FDIC Board today
as compared to the 2013 current rule and the 2018 NPR.
At the holding company level, based on publicly available Y-9C data as of year-end
2018, the 2013 current rule and the 2018 NPR capture within the definition of trading account
for purposes of the Volcker Rule over $2.4 trillion of financial instruments.
The final rule before the FDIC Board today, because of its narrower definition of trading
account, captures over $1.8 trillion of financial instruments for purposes of the Volcker Rule.
Thus, at the holding company level, about 25 percent of the financial instruments subject to the
2013 current rule and the 2018 NPR would no longer be subject to the prohibition on proprietary
trading.
At the bank level, based on publicly available Call Report data as of year-end 2018, the
impact of the final rule would be far more severe. Under the 2013 current rule and the 2018
NPR, a total of nearly $1.2 trillion of financial instruments would be subject to the Volcker Rule
prohibition on proprietary trading at the bank level. Under the final rule before the Board today,
$635 billion of financial instruments would be subject to the Volcker Rule. In other words, at the
bank level, the final rule would exclude about 46 percent - nearly half - of financial instruments
from the Volcker Rule that are subject under the 2013 current rule and the 2018 NPR.