On behalf of Data Boiler Technologies, I am pleased to provide the FED, SEC, CFTC, FDIC, and OCC (collectively, the “Agencies”) with comments and thanks for acknowledging our prior comments 9 times in the preamble of the agencies’ proposal to revise section 13 of the Bank Holding Company Act (a.k.a. the Volcker Rule). This proposal is considered in midst of a global financial turmoil that triggered by the novelty Coronavirus (CoVID-19) situation. Indeed, this is exactly the moment I long advocated for the need of and referred to as “Stress RENTD”. It is time for banks to pour liquidity to markets and temporarily lifting related regulatory restrictions on their ability to scoop up troubled assets to restore financial stability.
As I have said in my comment to OCC in 2017 and additional comments to all 5 agencies in 2018, the Volcker’s covered fund requirements are the Rule’s heaviest burden as compared to proprietary trading. My 2018 estimate of covered fund compliance cost for the top 46 banks are between $152 million to $690 million, excluding the $3.63 billion expected loss from divesting impermissible toxic assets (5.5% x $66 billion) in their portfolio per the OCC’s original analysis of 12 CFR Part 44. It may be a crowded market when everyone rushes to off-load these assets as it draws closer to the 2022 deadline. The sooner banks can get rid of these toxic positions, the less capital surcharge for them. However, the current financial turmoil is definitely not the right time to ask banks for a stable runoff of these assets, or it is practically impossible during this crunch time.
That being said, we are in support of temporary relief of compliance burden and limited revisions to the Rule’s covered fund provisions. However and please make no mistake about our strong opposition to the many changes to the Rule’s proprietary trading provisions – RENTD in particular. As we have seen how other countries swept their troubled assets under the rug, their banks are trading at substantially lower multiple than our banks in the US. If the agencies choose to permanently water down prudential rules and banks’ compliance standards, allow me to remind everyone that these short-term gratifications would come at an expense detriment to our long-term soundness and prominent leadership position around the World’s banking industry.
The agencies, and the FED in particular, should take a more restrain and long-term view to our Country’s financial policy and seek ways to ensure that the cumulative effects of such deferred treatment of toxic assets would not inadvertently lead to other problems that may cascade or lead to uncontrollable or difficult to control consequences, or prevents the abuse of the temporary tolerance process to bypass prudent controls. Also, we have reservations toward some of the backward thinking by former FDIC Vice-Chair Hoenig. To quote him, he calls for a “return the safety net to its original purpose—that of protecting the payments system and the depositor.” Banks are not merely payment processors and deposit takers in the 21st century! It is better for banks to play the market maker role in serving the economy, than pushing investment banking functions out to the shadow banking system and High Frequency Trading firms. The FDIC should not simply pass the buck to let other agencies deal with modern days’ financial engineering problems. His suggestion to partition commercial and investment banking activities by creating separate legal entities only benefits law firms.
Summary of responds to the agencies’ questions are as follow:
- Qualifying Foreign Excluded Funds: US nexus concern – temporary relief based on prevailing market turmoil is more suitable than a permanent relaxation of the Rule;
- Foreign Public Funds: less than ideal but acceptable, new requirements make sense that the distribution is subject to “substantive disclosure and retail investor protection laws or regulations;
- Loan Securitizations: allowing a limited amount of non-loan investments would be contrary to policy objective about divesting toxic assets to make banks healthier, so NO;
- Public Welfare and Small Business Funds: Public Welfare exemption per CRA does have merits; Volcker never prohibits banks from direct lending to small businesses. Why should there be frequent buying and selling of these SBIC funds?
- (NEW) Credit Funds: This is tricky because prevailing market turmoil does call for life-line support in extending credits. Yet, if can’t be restructure to fit the JV and loan securitization exclusions’ requirements, it is probably toxic!
- (NEW) Venture Capital Funds: distinguishing VCFs with Hedge Funds / Private Equity Funds is one thing, but the emphasis is about the manner of speculative bet, not necessarily the risk of the investment vehicle per se, so NO;
- (NEW) Family Wealth Management Vehicles: Controversial because Congress indeed recognized family offices are not within the sphere of investment advisers; we go from opposing to supporting this exclusion under conditions;
- (NEW) Customer Facilitation: It is a matter of balancing the right controls with fulfillment of customer needs; suggest banking entity and its affiliates can hold only up to 0.5% interest while impose more use restrictions;
- Limitation of Relationships with a Covered Fund: the agencies did a commendable job identifying reasonable criteria for their proposed removal of senior loan or senior debt interest from definition of ownership interest;
- Parallel Investments: This is the so called proprietary trading in an arm’s length, but without the 3% limit; OK to raise cap limit from 3% to 6% under stress; should discourage parallel investments that run like “wheel of fortune”.
In our opinion, there is an opportunity to streamline the Rule’s covered fund provision by rewritten it to become the 21st Century Glass-Steagall Act. To ensure shifted risks would not come back to haunt banks, the industry as a whole may look into the asset gathering and fund distribution processes (e.g. monitor the banking entity’s investments in, and transactions with, any covered funds), and use behavioral science to ensure “exit only, no re-entry” – like “letting go” of bad habits/toxic assets. We will be glad to discuss further specifics with the regulators, industry groups, and banks, and/or testify in front of Congress upon request. Please click here to see our full 40 pages respond to the 5 agencies. Blessing and stay well amid the Coronavirus situation.
