A weakened Volcker Rule better than no Volcker Rule?

July 8, 2010 | By Jim Kim

It's no secret that the vaunted Volcker Rule has been fairly significantly watered down. As it stands now the Volcker Rule will allow big banks to hold no more than 3 percent of hedge or a private equity fund's capital. Big banks also will not be able to hold more than 3 percent of their tangible common equity in hedge funds and buyout shops. So will this lead to a rash of divestments?

We've noted that there are a lot of delays built into the process. Bank regulators, including the Federal Reserve, will have a lot of discretion in deciding how long banks will have before divesting their funds, what speculative trading is permissible and the extent to which big banks can buy insurance against packaged mortgage securities they sell, notes MarketWatch.

Regulators will likely take between 15 months and two years to write the final rules. After that, big banks will have two years to cut their holdings in the hedge funds and private equity firms to the prescribed level. They could have three additional one-year extensions for that. In some cases, 12 years could pass before any sort of compliance is required. On top of all of this, some wonder if rules can actually be written that separate a bank's proprietary trading from its market making trading.

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