A new report from the Securities and Exchange Commission staff undercuts one of the motivations for the Trump administration’s efforts to revise one of the major post-financial crisis rules on banks.
The 315-page report released Tuesday afternoon, requested by Congress at the end of 2015, concludes that there is no evidence that the Volcker Rule, the regulation preventing banks from speculating with deposits insured by the government, has damaged banks’ ability to lend.
Last week, a top banking regulator kicked off the process to revise the Volcker Rule. In June, the Trump Treasury said in a report that the rule might be hindering banks’ ability to create liquidity. For years, bankers have raised the concern that, if a crisis were to hit, the rule might prevent them from carrying out the trades necessary to keep bond markets functioning.
Yet the report from the SEC found otherwise.
“Overall, it is not clear that corporate bond market liquidity has deteriorated following the enactment of the Dodd-Frank Act, the implementation of the Volcker Rule,” or the imposition of new capital rules, the report read.
Instead, the SEC staff found that there has been more bond trading, with lower transaction costs, following the rule’s implementation, suggesting that markets are functioning well and that demand for bonds is being met.
The report also found no evidence that the rule has damaged liquidity in Treasury markets.
Other analyses, including one from the Federal Reserve’s Board of Governors, have found evidence that, in a panic, the Volcker Rule could prevent banks from being able to meet the demand for corporate bonds, meaning there is a risk that the rule could create the kind of market disaster it was meant to prevent. On that point, the SEC report said there wasn’t sufficient evidence to draw a conclusion.
The June Treasury report called for allowing smaller banks to avoid the rule and simplifying it for big banks. Daniel Tarullo, the point man for regulation at the Fed during the implementation of Dodd-Frank, endorsed some of those goals before leaving office.
