With regulators tasked with finalizing the Volcker rule, Democratic lawmakers want them to make sure that the rule makes clear that banks are allowed to invest in venture capital funds. The proposed rule is geared toward lowering financial system risk by not letting banks to take part in proprietary trading, while limiting how much they can invest in private equity and hedge funds.
The lawmakers, 26 of whom have written to the federal agencies working on the rule, noted that venture capital firms are not as high risk as private equity and hedge funds. The Volcker rule would be an implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 619. Once finalized, it will go into effect on July 21.
Meantime, European Union Council of Ministers President Margrethe Vestager wants to make sure that the Volcker rule treats non-U.S. sovereign debt and US government securities the same. Vestager wrote to Federal Reserve Chairman Ben Bernanke making her case that the federal agencies need to make sure the extraterritorial application of the Volcker rule doesn’t happen. Vestager is concerned that otherwise the competition for non-US banks would be impeded.
She called on Bernanke to make sure the demarcation between proprietary trading and market-making that is beneficial is made clear so markets can keep working effectively and properly and banks don’t have to curb their market-making. Vestager said that currently, the proposed rule takes US government securities out of its scope, but that non-US government securities remain within. She says this would create an uneven playing field where US treasury bonds would have the advantage over EU sovereign debt in the sovereign debt markets. She also expressed worry that the rule’s proprietary trading ban would impact non-US banks if their trades were to occur through US counterparties and exchanges. Similar concerns have been expressed by European Commissioner for Internal Markets and Services, Michel Barnier. Speaking at a US Chamber of Commerce event, he said that it wouldn’t be acceptable for US rules to so widely impact foreign capital markets and other countries especially with a lack of “international coordination.” Asian governments have also expressed concerns about the rule’s potential reverberations.
Local US governments have also taken issue with the Volcker Rule. Local and state officials are worried that the rule could make it more costly for them to raise funds from investors. Municipalities have also expressed concern that it could limit banks’ buying of their bonds while raising the interest rates that bond issues could end up paying to bring in investors.
Local, state and foreign officials attack Volcker Rule, The Washington Post, February 28, 2012
Volcker Rule Must Allow Banks to Invest In Venture Capital Funds, Democrats Urge, BNA Banking Daily, February 23, 2012
EU Urges Equal Treatment for US Bonds, Foreign Sovereign Debt Under Volcker Rule, Bloomberg/BNA, February 24, 2012
Read Vestager’s Letter (PDF)
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