US financial regulators decided to exempt community banks from the Volcker Rule. This is a landmark decision regarding community banks and their ability to invest their money in hedge funds or private equity funds. The Volcker Rule, which was birthed out of the 2009 Dodd-Frank Act has faced starch criticism since its inception due to the burden that it puts on smaller, community banks.
The American Bankers Association position on the Volcker Rule is that, “it should be removed in it’s entirety, and that in the meantime, regulators work to mitigate the rule’s harmful effects by shifting the regulatory focus to clearly defining which activities are specifically prohibited under the rule.”1 It is exciting to hear federal regulators listen to the opinions of community banks and their representatives and remove this rule. One example of the burden that the Volcker Rule put on community banks comes from the International Monetary Fund’s top risk official that stated, “regulations to prevent speculative bets are hard to enforce and that the Volcker Rule could unintentionally diminish liquidity in the bond market.”2 These unintentional consequences were issues that arose years after the Volcker Rule was enacted, and it is a positive to have this burden lifted.
However, the ruling does come with some contingencies for community banks. The ruling stated that this exemption from the Volcker Rule only applies to banks under $10 Billion in total assets, everyone over that threshold must continue to comply with the regulations presented in the Volcker Rule.3 Nonetheless, community banks under 10 Billion will enjoy the decrease in compliance and regulatory oversight that had prohibited these banks from investing their money. Hopefully, the financial regulators in the Southern District of New York and Washington D.C. will continue to prioritize the needs of community banks.