Volcker Rule Risk Concentrated in 25 Banks

Bloomberg on the Volcker Rule:

“This Bloomberg Government Briefing finds that only 25 bank holding companies will have to report the quantitative measurements required under the proposed Volcker rule that eliminates proprietary trading. Such trading, which occurs when a financial company risks its shareholders’ capital by trading in the market, was banned in the Dodd-Frank law.

Regulators on Oct. 11 released a 298-page proposed rule1, named after former Federal Reserve Chairman Paul Volcker, detailing the quantitative measurements2 banks must use to evaluate all trading. These reporting measures include calculating future risk of loss, net profit and fees earned by each trading unit and the company itself. Banks with less than $1 billion in trading assets and liabilities are exempt from the disclosures, though they are still banned from proprietary trading. Reporting is mandatory for firms with $1 billion or more in trading account assets and liabilities3.

The rule allows customer-driven trades, market-making activity, hedging and some investments in hedge funds and private equity funds. The proposal doesn’t include numerical thresholds to determine what is — and isn’t — proprietary trading. This may make it difficult to determine which trading is prohibited.

This briefing finds:

  • The top 13 bank holding companies with trading assets and liabilities of $5 billion or more will have to comply with 17 reporting requirements4 for each of their subsidiaries and trading units. The metrics cover company-level and trading-unit-level risk, compensation and portfolio structures. It will take about 2,000 staff hours, or one staff year, per qualified subsidiary and trading unit to comply each year.
  • A second tier of 12 bank holding companies with trading assets and liabilities of at least $1 billion and less than $5 billion will have to comply with eight new reporting metrics for each of their subsidiaries and trading units. That would take about 1,900 staff hours of work annually per qualified subsidiary and trading unit.
  • The remaining 995 bank holding companies won’t have to comply with new reporting requirements in the Volcker rule because they don’t engage in sufficient trading activities, though they may have to adopt internal controls. These entities and their subsidiaries won’t be allowed to engage in proprietary trading.

Companies Subject To Most Stringent Reporting REquirements

There are 13 bank holding companies with trading assets and liabilities of $5 billion or more.10 These companies must report individual trade-level position information for each of their subsidiaries and market-making trading entities within each of the subsidiaries. The 17 required quantitative measurements, found in Appendix 1, must be calculated daily, and reported to regulators monthly for each market-making unit, and five of these metrics must also be reported for the company’s other trading units. Each company could have dozens of individual trading units that must comply.


Table 1: Bank Holding Companies With Average Trading Assets and Liabilities of $5 Billion or More

In billions, average calculated using the last four quarters of Y-9 data reported to the Fed from Sept. 30, 2010, through June 30, 2011.

Source: Federal Reserve and BGOV analysis


1 Federal Reserve press release and link to draft rules: (retrieved Oct. 11, 2011).

2 Detailed in Appendix 1.

3 As reported to regulators on a bank holding company’s consolidated financial statements. This is a quantification of the firm’s overall trading activity.

4 Ibid.

10 Assets and liabilities are defined in the proposal on page 11: “A banking entity must comply with proposed Appendix A’s reporting and recordkeeping requirements only if it has, together with its affiliates and subsidiaries, trading assets and liabilities, the average gross sum of which, (on a worldwide consolidated basis) is, as measured as of the last day of each of the four prior calendar quarters.”

11 Average trading assets plus average trading liabilities as reported on Line Items 5 and 15 of the Consolidated Balance Sheet in the bank holding company’s Y-9 during four quarters.

12 Data for RBC was reported for only the past three quarters; therefore BGOV averaged for three quarters instead of four.

Bloomberg Government Briefing
Volcker Rule Risk Concentrated in 25 Banks
L.P. »www.bgov.com

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