trending Market Intelligence /marketintelligence/en/news-insights/trending/B88tezbBMLMPLvuOG_vo3w2 content esgSubNav
In This List

Community banks stood pat on trading assets after Volcker relief

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Community banks stood pat on trading assets after Volcker relief

Regulators recently loosened Volcker rule compliance requirements for regional and national banks, generating concerns that too-big-to-fail institutions could become riskier by growing their trading positions. But when legislators freed community banks from the Volcker rule last year, those smaller lenders barely changed their trading positions, according to S&P Global Market Intelligence data.

Community banks, defined as those with less than $10 billion in total assets, were exempted from the Volcker rule by S. 2155, also known as the Crapo bill, as long as the bank's trading position — the sum of trading assets and trading liabilities — was less than 5% of total assets. The data show U.S. community banks, in aggregate, modestly increased trading liabilities over the last year but pared their trading assets.

In aggregate, U.S. community banks increased their trading positions by $17.6 million, or 1.4%, since the passage of S. 2155. That was significantly less growth than the 7.7% increase in total assets over the last year, meaning the banks' trading positions as a percentage of total assets declined.

Some banks posted more dramatic increases in trading assets. Two community banks crossed the 5% threshold since the passage of S. 2155: Fulton Savings Bank and Midwest Independent Bancshares Inc. Fulton Savings President and CEO Michael Pollock said the increase in trading assets was due to the reclassification of equities that the bank has held for years.

"We don't actively buy and sell anything," he said, adding that he did not think breaching the 5% limit would subject the bank to the Volcker rule. "No one's said anything."

SNL Image

Regulators' Aug. 20 approval of "Volcker 2.0" clarifies that the bank need not worry about its compliance with Volcker. While the bank's trading assets were in excess of the 5% threshold set by S. 2155, it was still well below the $1 billion threshold established under Volcker 2.0. Banks with trading assets and liabilities of less than $1 billion are subject to the Volcker rule but are presumed compliant by regulators and have zero compliance requirements. However, regulators can remove this presumption of compliance if an examination or audit finds the bank has engaged in activities prohibited by the Volcker rule, according to a legal analysis by Cadwalader Wickersham & Taft LLP, a law firm.

Banks with more than $1 billion of trading assets and liabilities also received regulatory relief under Volcker 2.0 in the form of reduced compliance requirements. Scott Cammarn, a partner at Cadwalader, said in an interview the changes amount to "a shift away from the presumed guilty approach to a more balanced approach," adding that banks are still prohibited from excessive risk-taking.

"Nothing in this rule green-lights banks to engage in trading for short-term profit," he said.

Community banks have long argued the Volcker rule compliance requirements were unnecessary since proprietary trading had never been a business line of focus for smaller banks. But for large financial institutions, certain regulators and credit analysts have expressed concerns that the Volcker rule rollback could allow the sort of risky trading activity that played a role in the 2008 financial crisis.

In an Aug. 26 note, analysts from Moody's called Volcker 2.0 a credit negative for banks since it could allow greater risk-taking. Andrea Usai, associate managing director covering North American banks for Moody's, said the rating agency is not necessarily predicting banks will take on risky trading activities.

"We are not attributing any likelihood that they would do it, but they have the opportunity," Usai said in an interview. "If profits are under pressure, they might want to offset some of the pressure with trading revenues and they very well might engage in these activities."

With an inverted yield curve in place, several equity analysts have predicted that net interest margins have peaked for the industry. Analysts at Fitch Ratings also issued a note expressing concern over what Volcker 2.0 could mean for the creditworthiness of banks. The analysts argued in the note that banks might use the regulatory relaxation to engage in algorithmic trading and that the rating agency could take negative action if banks took on proprietary trading positions.

At the same time, Fitch's analysts noted that it was too early to tell whether banks would take full advantage of the opportunity. Christopher Wolfe, a managing director for Fitch, said in an interview that banks have pulled back from proprietary trading for reasons beyond the Volcker rule. For one, regulations still require high levels of capital and some shareholders might be skeptical that trading could be an appropriate use of that capital.

"Trading can be very volatile, and shareholders don't always value that," Wolfe said.

SNL Image