Standard & Poor's released an analysis on Monday contending that Goldman Sachs and Morgan Stanley, more more than any other Wall Street giant, could suffer under the so-called Volcker Rule.
The rating agency warned that an especially stringent version of the yet-finished rule might prompt S.&P. to downgrade the ratings of certain big banks.
“A stricter rule could hurt these institutions' business positions and have a broader impact across several other firms,†S.&.P. analysts wrote. The analysts predicted a “one-in-three chance†that Goldman and Morgan would undergo a downgrade.
Named for Paul A. Volcker, a former chairman of the Federal Reserve who championed the it, the rule aims to rein in the level of risk-taking that prompted government bailouts in the financial crisis. The rule, a centerpiece of the Dodd-Frank Act's financial regulatory overhaul, would prohibit banks from making most bets with their own money, a once lucrative practice know n as proprietary trading.
Goldman might seem like a curious target. It moved two years ago to spin off or unwind its proprietary trading desks. But Goldman and Morgan, S.&P. said, derive a lopsided amount of revenue from trading compared with their rivals.
Still, S.&P. acknowledged that the threat stretches beyond Wall Street to banks like PNC, U.S. Bancorp, and Wells Fargo. The rating agency said the rule could collectively deprive the nation's eight largest banks up to $10 billion in annual earnings, up from earlier estimates of $4 billion.
The true fallout lurking in the rule is something of a mystery. S.&P. can only estimate the toll, until regulators put the finishing touch on the Volcker Rule.
Regulators recently entered a final stage of rule-writing after officials from the Fed and other agencies settled their differences over certain exemptions to the rule, according to people briefed on the matter. Regulators initially hoped to finalize the r ule by September, the people said, but they now expect wrap up their effort after the November election.
A point of contention among regulators is where to draw the line on proprietary trading. While regulators will ban standalone proprietary trading outfits at big banks, such activity can seep into other trading desks under the guise of helping clients.
Calling the rule “complex, controversial and contentious,†S.&P. called on regulators to clarify an earlier proposal.
“The Volcker Rule is perhaps the most complex and controversial part of the Dodd-Frank Act, and we believe the potential outcomes could vary widely, depending on the final rule,†S.&P. wrote.
