The devil will be in the details but some broad projections can be made.
The White House’s “Volcker Rule” is pretty vague at this point. But bankers and analysts are already making a few broad projections about how it will affect companies. Some of these are alarmist attempts to strangle the measure in its crib. But assuming it does become law, it’s true that the Volcker Rule will have a profound effect on the financial markets.
First, there’s a chance that bid-asked spreads could widen as market makers seek to recoup revenues lost due to the ban on proprietary trading. Depending on how tightly the prohibition is written—and thus how it will affect market makers’ abilities to take directional bets by biasing their books—banks could become less willing to take a loss on capital intensive, low-return businesses like lending in return for capital markets sales and trading business.
Second, for the above reason (and the proposed limit on wholesale liabilities) regional banks are likely to see an increase in C&I business at the expense of the too-big-to-fail crowd. Several regionals saw their stocks rally after President Obama’s press conference on Thursday, while the shares of money center banks and big investment banks tanked. While, from a systemic risk point of view, a shift toward smaller lenders would be a welcome development, it makes the process of re-evaluating a banking group pretty dicey until the dust settles and the final form of the legislation emerges.
Third, carving hedge and buyout funds out of bank conglomerates will reduce their artificially low cost of capital, which is good for companies that feel unfairly targeted by them, but could be bad for liquidity in the capital markets overall. The cost of capital for a stand-alone hedge fund will be higher than for one nestled in a financial supermarket that also holds a lot of taxpayer-insured deposits.
Finally, in the short-term, the Volcker Rule’s populist octane could be just the fuel the administration needs to get the larger financial reform bill through Congress. That legislation was looking increasingly compromised by lobbyists and Republican intransigence late last year, but the president’s new gambit will prove politically hard to oppose. That could be bad for treasurers if supporters of a tougher stance on OTC derivatives—such as lame-duck Senate Banking Committee chair Chris Dodd—decide to abandon the corporate exemption.