The quality and effectiveness of banks’ data management could very well be at stake due to the regulatory constraints fundamental to the Volcker Rule, according to a new cost projection by the Office of the Comptroller of the Currency.
As presently constituted, the Volcker Rule – which restricts the investment activities of banks – has the potential to cost U.S. banks as much as $4.3 billion. At a minimum, it may run banks $413 million. The reason why is because it compels financial institutions to sell some of their investments, oftentimes at a loss.
“The range of our cost estimate primarily reflects the uncertainty of the final rule’s impact on the market value of banks’ investments,” the text of the OCC report indicated. “A decrease in demand may follow the imposition of the restriction on banks holding collateralized debt obligation and collateralized loan obligation assets, and we estimate the market value of this impact between zero and $3.6 billion.”
Further breakdown of costs
Then there are the compliance management costs to consider, which involve various reporting requirements. The OCC analysis predicted that these could range from a low of $402 million to a high of $541 million. Meanwhile, expenses associated with estimated capital deductions could be between $147 million and $165 million.
Elected officials and regulators have stated that the Volcker Rule is a compliance mechanism that only affects large banks. However, OCC found that in addition to the 46 large banks it affects, seven smaller banks stand to be impacted as well.
Since the beginning of the year, bankers have attempted to convince regulators to ease the rule. In January, there was some acquiescence, after five federal agencies gave banks the go-ahead to continue to hold on to trust preferred securities, which had previously been restricted. This ultimately led to the American Bankers Association opting to abandon their lawsuit.
Ken Bentsen, president and CEO of the Securities and Financial Markets Association, penned an op-ed piece for political news source The Hill in early March. He pointed out that the Volcker Rule had “glaring omissions,” which could ultimately lead to poor data governance because misunderstandings about what banking institutions are required to report and to whom.
“This lack of a clear, transparent and consistent approach to address and resolve regulatory issues will only increase costs, make compliance more challenging, delay achievement of the regulatory goals and exacerbate burdens that undermine activities beneficial to the economy,” said Bentsen.