I have long been
The Volcker Rule neither favors nor disfavors community banks. It prohibits all FDIC-insured banks and their affiliates from investing in hedge funds. It was adopted because during the last financial crisis banks of all sizes experienced significant losses from investments in complex, unregistered on- and off-balance sheet funds. It is common knowledge that these losses seriously impacted the Deposit Insurance Fund. If the fund were used to protect deposits that underwrite such activities and their unique risk, it would require a significant increase in insurance premiums to account for such risk. Since all banks would share such a premium adjustment — thereby shouldering the risk of the few institutions making these types of investments — this seems unwise.
Community banks play an essential role in the American financial system and provide the majority of small business and farm loans, among other lending and general banking services. This is their core competency. While regulators are not opposed to community banks investing in new technologies, it should be for the purpose of better serving their customer and community and not a wager on whatever the hot technology stock is at the time.
At the same time, the industry is well aware that there already is an effort underway by regulators to determine whether the Volcker Rule can be made less burdensome. However, a blanket exemption from the Volcker Rule for banks under a certain asset size — just so community banks can place bets on new technologies funded by venture capital — seems imprudent and certainly unwarranted. In fact, doing so would only reinstate the use of insured deposits to be freely invested in opaque hedge fund-type vehicles subject to extreme volatility in their promise of ever-higher yields, while doing little to further the mission of a community bank.
Importantly, whether it is fintech-based or otherwise, a fund can be structured to comply with the Volcker Rule, or to fall outside its scope, in a manner that would allow any bank to invest as long as it meets its board-approved investment policy. Indeed, many types of funds have been able to conform to the rule over the last several years without undermining their performance or limiting their market.
And contrary to recent
I would suggest that if smaller banks are concerned about inequity then they should focus on the differences in their much higher cost of capital compared with their too-big-to-fail GSIB counterparts in the United States. That is the playing field they should work to level if they are truly interested in their long-term prospects. Compromising the Volcker Rule to allow community banks to own hedge funds will only place them, depositors and the insurance fund at greater risk.