As Regulators Consider Further Gutting Financial Reform, Merkley Presses on Volcker Rule Enforcement

WASHINGTON, D.C. – Oregon’s Senator Jeff Merkley today pressed federal banking regulators on reports that they are considering further gutting the Volcker Rule, and whether regulators are falling down on the job when it comes to current Volcker enforcement.

Merkley and former Senator Carl Levin (D-MI) co-authored the Volcker Rule, one of the landmark provisions of the 2010 Dodd-Frank financial reform law, which prohibits traditional banks from engaging in hedge fund-style gambling with taxpayer-insured deposits.

“Over the past few months, while your agencies have worked towards weakening the Volcker Rule to allow banks a free hand to profit from speculative trading, it seems that you have ignored a growing body of evidence suggestive of certain banks’ substantial non-compliance with the rule,” wrote Merkley in a letter to the heads of the five federal banking regulators charged with enforcing the Volcker Rule. “Although not conclusive, this evidence should have prompted your agencies to dig deeper and, where appropriate, enforce the Volcker Rule’s relevant provisions and not try to water them down.”

Merkley noted a recent Federal Reserve Board study that found that on average, some banks have amassed weekly trading profits of as much as $117 million, weekly losses up to $84 million and weekly exposures as high as $505 million. He also pointed to wild swings in sales and trading revenue, and alarming data about the discrepancy between banks’ estimates of their anticipated losses (values at risk, or “VaR”) and the reality. The VaR is a bank’s own estimate of how much it stands to lose in a single trading day. Losses should not exceed a bank’s VaR more than 1 percent of the time. Yet in the last few quarters alone, some banks have reported loss ratios that exceed VaR by 200 percent, and, in one instance, by as much as 1,200 percent.

“These trends raise red flags. They deserve your attention. Before you gut the most important structural reform to have emerged from the financial crisis—a reform that the Federal Reserve’s own economists conclude has had ‘economically large financial stability benefits’—you should investigate these trends,” Merkley continued. “In order to give taxpayers some indication that you are on the job and effectively policing the markets, I request an extensive report on enforcement of the Volcker Rule with a detailed explanation on how the press reports and regulatory filings referenced above did not violate the rule.”

Merkley also pressed regulators for transparency on key Volcker enforcement data. Despite the Fed Vice Chair’s testimony to Congress that public release of this data was a “very reasonable request,” regulators have yet to release it despite years of data requests from Merkley and other members of Congress.

Merkley’s full letter to financial regulators is available here, and follows below.

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Dear Chairman Powell, Chair McWilliams, Comptroller Otting, Chairman Clayton, and Chairman Giancarlo:

I am deeply troubled by recent news reports suggesting that your agencies, which are charged with enforcing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Volcker Rule, may be on the verge of adopting changes to the rule that are even more damaging to its core than your ill-founded 2018 proposal.[1] If true, your actions would constitute another attempt to undermine a critical provision of the law that seeks to prevent banks from gambling with depositor funds and putting taxpayers at risk.

Over the past few months, while your agencies have worked towards weakening the Volcker Rule to allow banks a free hand to profit from speculative trading, it seems that you have ignored a growing body of evidence suggestive of certain banks’ substantial non-compliance with the rule. Although not conclusive, this evidence should have prompted your agencies to dig deeper and, where appropriate, enforce the Volcker Rule’s relevant provisions and not try to water them down.

Specifically, data presented in a recent Federal Reserve Board study raise serious questions.[2] Using confidential high-frequency regulatory data, the study’s authors found that, on average, some banks have amassed weekly trading profits of as much as $117 million, weekly losses up to $84 million and weekly exposures as high as $505 million.[3] These findings not only seem to echo recent news reports of some traders raking in windfall profits and suffering outsized losses but also are instructive of the frequency with which they may be doing so.    

Perhaps more alarming is the ratio of some banks’ profits and losses to their values at risk (“VaR”).  The VaR is a bank’s own estimate of how much it stands to lose in a single trading day. Losses should not exceed a bank’s VaR more than 1 percent of the time. Yet in the last few quarters alone, some banks have reported loss ratios that exceed VaR by 200 percent, and, in one instance, by as much as 1,200 percent.[4]

Bank filings with the Securities and Exchange Commission raise similar questions. The most recent Form 8-K filings of five of the eight largest global systemically important banks reflect wild swings in sales and trading revenue relative to prior quarters. The variability has been most dramatic in the banks’ fixed income, currency and commodity lines of business, with Morgan Stanley, Goldman Sachs and Citigroup each experiencing variations in revenue of between 18 and 30 percent quarter over quarter.[5]

These trends raise red flags. They deserve your attention. Before you gut the most important structural reform to have emerged from the financial crisis—a reform that the Federal Reserve’s own economists conclude has had “economically large financial stability benefits”[6]—you should investigate these trends. In order to give taxpayers some indication that you are on the job and effectively policing the markets, I request an extensive report on enforcement of the Volcker Rule with a detailed explanation on how the press reports and regulatory filings referenced above did not violate the rule.

Once again, I am also requesting that regulators release the confidential data that I have now repeatedly asked for over several years. In a recent Congressional hearing, Federal Reserve Vice Chair for Supervision Randal Quarles referred to lawmakers’ request for public release of Volcker Rule data as a “very reasonable request.”[7] This data will help ensure that any future changes to the Volcker Rule are grounded in the type of rigorous analysis befitting a rule of its import.

 Sincerely,