A standout element of the bill was an amendment to raise the total asset threshold at which non-GSIBs are subject to additional regulations – such as heightened capital requirements – to $250 billion from $50 billion.
When the US banking agencies proposed rules to implement these changes in October 2018, the draft provided regulators with some latitude around how capital requirements would apply to smaller institutions.
The proposal would largely benefit firms with less than $100 billion in total assets, although larger regional banks with more than $100 billion in total assets would also be subject to reduced capital and liquidity requirements relative to those applied to GSIBs. US regulatory agencies have proposed a similar tailoring framework for foreign banking organizations operating in the US.
Another change in the Crapo Bill would exempt custodial bank funds sitting on deposit at qualifying central banks from being taken into account when calculating the Supplementary Leverage Ratio (SLR), one of the capital rules for large banks including GSIBs. The US banking regulators released a proposal on this change on April 18, 2019, specifying that the treatment applies only to BNY Mellon, State Street and Northern Trust. The Crapo Bill also would add certain municipal obligations to the bucket of so-called “High Quality Liquid Assets” that banks, including GSIBs, can count for the purposes of their liquidity thresholds. The US banking agencies implemented this provision in a final rule on May 30, 2019.
The Volcker Rule, which prohibits proprietary trading by banks, is the single provision of Dodd-Frank that has provided US regulators with the biggest implementation headaches.
The idea of Volcker was not publicly floated until January 2010, and when it appeared it came from the White House rather than from Congress or the Treasury.
Once in the statute book, the rule’s passage through the federal regulators quickly became bogged down in the rulemaking process. The measure required all five of the US financial regulators – the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, as well as the Securities and Exchange Commission and the Commodity Futures Trading Commission – to cooperate in developing language that would apply to all of the regulated entities under their jurisdiction, a challenging task.
The Volcker rulemaking has also been bedeviled by definitional questions. What activities constitute proprietary trading? What activities qualify for exemptions, such as legitimate market making and risk-mitigating hedging? And what metrics do banks need to put in place to verify that they are not violating the prohibitions?
Given these issues, it was hardly surprising that the first iteration of the Volcker Rule was not finalized until December 2013, three-and-a-half years after Dodd-Frank was signed into law. Shortly after it came into effect in 2015, however, industry critics began to protest that the rule as written was unworkable.
Some observed that the metrics required to be reported to regulators were too onerous and detailed, while some straightforward ones – such as the determination that any securities bought and sold by a bank inside 60 days would be deemed a proprietary bet – were criticized as overly simplistic.
The five agencies proposed an amended Volcker Rule in June 2018 designed to address some of these concerns.