U.S. banks pushed regulators to widen proposed restrictions on trading and hedge-fund ownership by foreign firms, then encouraged governments around the world to complain about the rule’s reach.
The two-pronged lobbying strategy resulted in foreign officials joining U.S. lenders to push back against the Volcker rule, named after former Federal Reserve Chairman Paul A. Volcker and incorporated in the 2010 Dodd-Frank Act.
In recent months, as regulators sought comments on a 298-page proposal to implement the Volcker rule, the outcry from banks has swelled. Lobbyists have argued that the plan would reduce trading in bond markets and increase borrowing costs for investors and companies. One industry-funded study said the additional expense just for the corporate bond market could be as much as $360 billion.
Even U.S. Senators Jeff Merkley of Oregon and Carl Levin of Michigan, who pushed Dodd-Frank’s Volcker rule provision through Congress, said in a Feb. 13 letter to regulators that the proposal goes beyond the bill’s original intent by seeking to prevent non-U.S. banks from owning stakes in private-equity or hedge funds offered to U.S. citizens.
Foreign banks, like their U.S. rivals, will have to prove that their buying and selling amounts to market-making for clients, not proprietary trading. They also can’t own more than a 3 percent stake in any hedge funds or private-equity funds that do business with U.S. residents, which would rule out most such investments, bankers and lobbyists say.
“For the EU to be treated as safe as U.S. Treasuries is laughable when they’re restructuring one of their member’s debt,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology. “The lesson we’ve learned from the EU crisis is that a bank should only consider as safe the debt backed by its own central bank.”
One example: Norinchukin Bank, which pools the resources of Japanese agricultural and fishing cooperatives. It has only one branch office in the U.S. and should be exempt from the Volcker rule, the Tokyo-based lender wrote in a Jan. 25 letter to regulators. Norinchukin borrowed as much as $22 billion of emergency funds from the Fed during the financial crisis, according to data released by the central bank and compiled by Bloomberg News.