Volcker Rules Could Impair Canadian Banks’ Ability to Handle Risk

Canada’s financial services regulator and Canadian banks are complaining about a central piece of the 2010 Dodd-Frank rules, which are designed to limit banks’ prop trading activities, among other things.

In a letter delivered to U.S. authorities in December and made public last week, Canada’s Office of the Superintendent of Financial Institutions (OSFI) said the so-called Volcker rules would reduce Canadian banks’ ability to handle both risk and liquidity, the Globe and Mail reports.

The rule, named for former U.S. Federal Reserve Chairman Paul Volcker, would prohibit bank holding companies from engaging in proprietary trading and investing in or sponsoring a hedge fund or private equity fund. The rules are awaiting comment until February 13th and could go into effect as early as this summer.

The Volcker rule is expected to apply to each foreign bank with a branch, agency or subsidiary in the U.S.

“Canadian financial institutions use U.S.-owned infrastructure to conduct financial transactions in support of their market-making activities in Canada, and in their risk management activities more broadly in support of their Canadian and U.S. banking operations,” OSFI head Julie Dickson said in the letter. “…OSFI is concerned that the draft regulations may have the unintended consequence of significantly impeding Canadian and other foreign financial institutions’ ability to manage their risks in a cost-effective manner,” Dickson said.

Separately, the Canadian Bankers Association complained about the Volcker rule, saying it would victimize Canadian banks.

News of the Canadian bankers and regulator’s concerns comes at a time when two U.S. House of Representatives subcommittees are about to meet to discuss the effects of the Volcker Rule on jobs and the economy.

The House Committee on Financial Services released a memo last Friday announcing the Wednesday hearing, noting that the reasoning behind the Volcker Rule is unclear, says Credit Newsline reports.

According to the memo, proponents of the Volcker Rule have argued that the new restrictions “would better protect taxpayers and help create a more resilient U.S. banking system.” There has been recent confusion, however, as to how or if the provision protects taxpayers from further bank bailouts and financial crises.

The Financial Institutions and Consumer Credit subcommittee and Capital Markets and Government Sponsored Enterprises subcommittee will hold the Jan. 18 hearing.

The heads of the Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Securities and Exchange Commission and the Comptroller of the Currency are expected to testify, in addition to Federal Reserve Governor Dan Tarullo.