Volcker Rule to be challenging for banks and regulators

With the American Banking Association deciding to drop its lawsuit regarding the Volcker Rule, the regulation that puts restrictions on banks and what investments can be made, some executives in the buy-side financial institution industry may be under the impression that the issue is being effectively handled. In other words, it’s not quite the compliance management concern that it was forecasted to be.

But according to experts on the subject, the Volcker Rule still represents “probably the most challenging rule of any regulation from the perspective of data collection, aggregation and reporting.”

That’s according to Mayra Rodriguez Valladeres, faculty member of Financial Market World and managing principal for a New York-based regulatory consulting firm.

In an opinion piece for American Banker, Valladeres noted that the inner workings of the Volcker Rule are extremely dense, and banks – both large and small – will likely have to restructure their information technology systems that hold reams of data, not to mention what reporting mechanisms they use for regulators. In fact, banks that haven’t gotten started with revamping their IT infrastructure may have to expedite things, as some reporting requirement go into effect this year, while the rest start in 2015.

“In order to have any hopes of implementing the Volcker Rule, banks will seriously have to rethink their strategy of what types of businesses they want to be in and what types of securities and derivatives they want to trade,” said Valladeres. “A number of banks have been deleveraging in the last few years in order to bolster their capital levels and avoid contravening the Volcker Rule. Of course, by deleveraging they may be lowering their risks, but they are also risking being less profitable.”

Assigning a point person may be necessary
She added that because the tenets of the Volcker Rule are so voluminous, banks may have to appoint someone on their staff to specialize in this set of restrictions, serving as the resident expert on the regulation that stemmed from the Dodd-Frank Act. In fact, the rule almost mandates this very thing, seeing as how CEOs have to provide proof every year that the appropriate processes are in place to “establish, maintain, enforce, review and modify” what compliance measures are in place.

“If regulators enforce this provision, CEOs will finally have to make compliance a priority,” said Valladeres.

At the same time, though, legislating the Volcker Rule won’t come easily for regulators, she stressed. As it is, there are already rules and procedures that call for increased oversight, so adding the assurance that banks are complying may prove to be a goal that can’t be achieved.

Though some people are skeptical of how forcefully the Volcker Rule will be implemented, experts largely agree that it’s better to be safe than sorry. In other words, expect it to be fully enforced. Financial analysts told Forbes recently that banks should be stepping up their recording activity, as it’s never been more important to be organized in the event of an audit, as these are likely to become more common.

Experts told Forbes that the additional hoops that banks will likely have to jump through will like be more expensive, but they aren’t by any means cost prohibitive. Additionally, the rules and regulations that are in the U.S. aren’t as substantial as those in the United Kingdom, even in a post-Volcker Rule climate.

Posts by Topics