After years of grappling with the Dodd-Frank Act, banks will soon learn what regulators want to do next to rein in Wall Street’s risky investments.
The Federal Reserve and other agencies are poised to issue a long-overdue report required by the law that lays out recommendations beyond the Volcker Rule to prevent financial firms from blowing up the economy, said two people with knowledge of the matter who asked not to be named before its release. The document will include plans for restricting banks’ investments in copper and hard-to-value assets, said one of the people.
While Congress said the report had to be completed within 18 months of Dodd-Frank’s approval in 2010, foot-dragging by regulators has made the exercise a bit of an afterthought in Washington. One group that has been dreading its release is bankers, who are worried the document might suggest sweeping changes to lenders’ ability to invest in physical commodities and buy direct stakes in companies.
“Dodd-Frank gives them the right based on further study to create policy to better protect our financial markets,” Mark Williams, a former Fed bank examiner who is now a lecturer at Boston University’s business school, said of regulators. He argues the law “did not go far enough in constructing the needed guardrails around our financial systems.”
Spokesmen for the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. declined to comment.
The report was required by a brief provision tucked more than 200 pages into Dodd-Frank under section 620. Lenders’ government watchdogs had to review the industry’s investment activities to determine whether they “could have a negative effect on the safety and soundness” of the financial system.
The mandate was easy to lose track of next to the sprawling passage that preceded it: section 619, which is better known as the Volcker Rule. One of Wall Street’s most hated Dodd-Frank provisions, Volcker instituted a wide-ranging ban on banks trading with their own money or taking big stakes in hedge funds.
The plan for copper — set to be issued as a proposed rule — would reverse a 1990s decision that designated the commodity a precious metal, a move that allowed banks to load up on it, one of the people said. JPMorgan Chase’s copper holdings played a starring role in a 2014 Senate investigation that found lenders used their ownership of metals and other physical commodities to dominate markets and gain unfair trading advantages.
The probe concluded that copper trading at JPMorgan raised “financial risk, conflict of interest and market manipulation concerns,” because the biggest U.S. lender had amassed huge inventories and sought to establish the first exchange-traded fund for the physical metal. JPMorgan has since shed much of its business and hasn’t pursued the copper ETF.
Still, the rule regulators are working on to label copper an industrial metal would prevent another bank from getting back into the market in a big way.Illiquid InvestmentsThe agencies’ report also will highlight concerns over concentrations of what are known as Level 3 assets that are the hardest for firms to put a price on. Such valuation issues arose with mortgage-backed securities during the 2008 financial crisis, when banks struggled to determine how much the assets were worth as markets dried up.
Some of the report’s recommendations can be implemented by the agencies themselves, such as the copper proposal. For any changes that require legislation, they’ll run into a politically divided Congress that has passed few significant bills affecting the finance industry in recent years.
But another overhaul of Wall Street rules could be on the agenda under the next president. Republican candidate Donald Trump has called for scrapping Dodd-Frank, and Democrat Hillary Clinton has argued the law didn’t go far enough.
Robert Schmidt contributed.