Fed offers five-year Volcker compliance lifeline

Banks that are having difficulty divesting their private equity holdings in order to comply with the Volcker Rule can apply for an extension.

Banks will be able to apply for an extension of up to five years to conform to the Volcker Rule, provided they demonstrate a good-faith effort to comply in time with the existing July 2017 deadline, the US Federal Reserve said on Monday.

Most financial institutions that are finding it difficult to divest their illiquid fund holdings – which can only represent 3 percent of tier 1 capital under the rule – should be granted an extension, provided they demonstrate they made an effort to meet the requirements within deadline, the Fed said.

To qualify, they will have to submit details on the funds for which they are seeking extensions, along with details on the efforts they made to comply. They will also have to say how much more time they need.

It is the final grace period the Fed can grant, following three previous one-year extensions, it said.

The rule, which is part of the 2010 Dodd-Frank Wall Street reform, is intended to keep banks from speculating with their customers’ money, and limits the amount of capital they can invest in private equity and hedge funds.

But it is uncertain whether the rule will remain in place for long, as various pieces of legislation that will impact it are passing through the US legal system. The Financial Choice Act, which calls for it to be scrapped, will soon be voted on in the Senate. A hearing on a second act, the Financial Regulatory Improvement Act, has been held by the House banking committee. This act would exempt banks with less than $10 billion in assets from the rule.