The banking industry can breathe a slow sigh of relief.
Yesterday, the Federal Reserve approved a two-year conformity period for all banks that will be impacted by the Volcker Rule, a section of Dodd-Frank that is designed to prevent financial institutions from making risky bets with their deposits. Essentially, this law was scheduled to go into effect in late July of this year, but banks will be able to adjust their investing and trading activities through the summer of 2014. There's just one problem: Banks don't have a clear-cut picture of what they actually need to do in order be compliant with the rule yet.
Now, banks do have a general understanding of how the Volcker Rule will impact them, so they can begin to make adjustments to their business models. Still, the law hasn't actually been finalized. Alexandra Alper at Reuters reports that the most recent version of the proposal was 300 pages long, and lawmakers simply haven't been able to untangle its complexities. My colleague, Claes Bell, covered some of these complexities last month, highlighting that the law could increase costs for individual investors.
These struggles continue to bring into question whether regulators can truly make it effective. The Federal Reserve Board's release even includes an additional disclaimer for the future: banks must conform by July 21, 2014, "unless that period is extended by the Board."
While I think that Volcker Rule has good intentions of limiting the high-risk, high-reward stakes of Wall Street and improving bank safety, I don't disagree with the two-year grace period. As we all know, financial giants cannot change their ways overnight. However, we certainly can't expect them to do so if regulators fail to give them a clear outline of their expectations.
Have you been following the debate over the Volcker Rule? How do you think regulators have handled its implementation?