United States financial regulators have come together to approve the “Volcker Rule,” which is part of the wider Dodd-Frank reform, and aims to prevent banks from undertaking trading activities that could be deemed risky or irresponsible. There has been widespread opposition to, and debate surrounding, the Dodd-Frank reform, particularly from the U.S. Republican party, who want to ease regulations aimed at private equity funds.
One takeaway from the Volcker Rule, however, is that private equity funds actually stand to benefit from these new regulations. It is well known in the finance world that higher risk generally leads to higher profit, should an investment prove successful. The Volcker Rule not only prevents banks from entering high-risk markets, but also from owning or supporting private equity funds.
As a result, riskier private equity markets are going to become less competitive; the path will be clear from 2015, when the Volcker Rule regulations have to be implemented, for private equity funds and other non-banking institutions, often labelled as the “shadow banking system,” to enjoy having the risker trades, and therefore the higher profit opportunities, to themselves.
Ernest Patrikis, a partner with White & Case New York, told Forbes, “You have to wonder how much of [the] Volcker Rule was driven by the shadow banking system. A whole lot of competitors have been eliminated.”
Patrikis added that the content of Volcker isn’t anything new, but that it represents a move to a regulatory system that is mandatory for all banks to follow. Rules have previously been in place, but have been unenforced supervisory guidelines rather than anything enshrined in law.
A President Obama statement, carried by the BBC said, “The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm’s practices.”
While the Volcker Rule does present an opportunity, it is likely that what is seen to be the overbearing regulations of Dodd-Frank will continue to put investors off speculating too much across the United States. However, those looking to relax regulations to benefit private equity markets will need to be careful that they are not seen to be trying to create a market simply for themselves.