Volcker Rule May Not Be so Bad for Banks

 | Dec 12, 2013 | 1:00 PM EST
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So the 953-page tome that makes up the Volcker rule is now out and set to go into effect on April 1 of next year. The document is now the most scrutinized piece of work in the financial industry.

One of the cornerstones of the rule is that it all but bans proprietary trading, or banks trading their own accounts. The rationale is that financial firms put themselves at greater risk, or even in conflict with clients, when they are trading their own accounts.

The Volcker Rule is expected to significantly reduce the "too big to fail' characteristic that defines many large financial firms. The market may see the rule as an impediment to revenue and profit growth at the nation's biggest banks.

Goldman Sachs (GS) is believed to be one of the firms most affected by the rule. Some analysts expect that 25% of Goldman's current revenues would cease to exist as a result of the rule. While the banking industry is generally averse to government regulation, I don't think the U.S. financial industry will suffer as much as anticipated. The intended effects of the Volcker rule have been known to the markets for many months and during that time, financial stocks have surged.

While some banks may lose some business, the perceived oversight of the rule is likely to induce more conservative mutual funds to look closer at banks. Despite the share price surge in names like Bank of America (BAC), Wells Fargo (WFC), Goldman, and JP Morgan (JPM) over the past several years, the financial industry still has a runaway. Interest rates, which remain at record lows, will inevitably go up. When they do, banks will able to charge more on loans at a faster pace than the interest they have to pay on deposits. As the net interest margins expand, bank profits will swell further.Look for banks which currently hold deposits that exceed loans. These banks have capital to lend and when rates go up, they will have cheap funding to do it with. With five months to go until the Volcker rule kicks in, financial firms will no doubt prepare themselves for the coming requirements. In the meantime, the effect of interest rates will be a far more significant variable than the Volcker rule.

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