The FSOC (Financial Stability Oversight Council) met on May 8, 2017, to discuss the Volcker Rule governing banks’ speculative trading. The FSOC chaired by Treasury Secretary Steve Mnuchin held a closed door meeting and then posted a brief statement saying in part it had “discussed efforts to assess the efficacy of the Volcker Rule.”1 This tackles one of Wall Street’s biggest concerns and is a sign that the Trump administration is listening to banks’ wishes regarding Dodd-Frank reforms. Lloyd Blankfein, Goldman Sachs Group, Inc. Chairman and CEO, said in an interview that banks should be freed from Volcker Rule restrictions that prevent them from taking some types of principal risk.2 He added, “They should be able to be principals because market-making is a very important public function of companies like ours. If we don’t do that, the drop in liquidity will not allow other people and industries and investors to accomplish their objectives, which are beneficial to the financial markets. There should be more flexibility.”3
While the FSOC is known principally for its role in designating some large companies as systemically important or “too big to fail,” it also has the power to adopt regulatory proposals for recommendation to financial regulators, with respect to issues that present a threat to the financial stability of the United States. Individual regulators are required to respond to these strong recommendations.4 A recent Federal Reserve study has indicated that the Volcker Rule poses such a threat since it limits liquidity in the corporate bond market.5
What This Means
The FSOC is a “super council” of federal financial regulators, chaired by the Treasury Secretary, and includes Trump administration appointees, such as newly confirmed Securities and Exchange Commission Chair, Jay Clayton, and represents one of the enormous powers granted to the executive branch by the Dodd-Frank Act. The FSOC’s powers are primarily governed by interpretative guidance and procedures, through its organizational operating charter and bylaws. By adopting changes to the FSOC charter and bylaws, Mnuchin’s Treasury Department could implement the same reforms that have been considered in the House, as part of the Financial Choice Act.6 While it may take some time before the Trump administration appointees constitute a majority on the council, the FSOC may prove to be the most powerful tool to implement the administrations promise to rethink Dodd-Frank, particularly as major financial services reform legislation may stall in the Senate.7
- U.S. regulators look at Volcker Rule, a sign they hear Wall Street,” Reuters, May 8, 2017. Access at: http://www.reuters.com/article/us-usa-banks-trading-idUSKBN1842H8
- “Blankfein Says Banks Should Be Unshackled From Volcker Rule,” Bloomberg, May 9, 2017. Access at: https://www.bloomberg.com/news/articles/2017-05-09/blankfein-says-banks-should-be-unshackled-from-volcker-rule
- Trump can rein in financial bureau without help from Congress,” The Hill, May 9, 2017. Access at: http://thehill.com/blogs/pundits-blog/finance/332537-trump-can-rein-in-financial-bureau-without-help-from-congress
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