S&P: Volcker Rule could lower bank profits by $10 billion

S&P estimates that out of more than $70 billion in earnings, $10 billion in earnings comes from banks making proprietary bets that the Volcker Rule would eliminate.

On reading this in a Bloomberg article, I immediately had two observations:

First, given that banks don't disclose how much they make from gambling, how would S&P know?

Second, no wonder the banks have been fighting against providing ultra transparency and disclosing on an ongoing basis their current global asset, liabilities and off-balance sheet exposure details so hard.

As everyone knows, if banks had to provide ultra transparency, their ability to profit from proprietary betting would effectively disappear as market participants would engage in behavior to reduce the profit potential of these bets.

It is no surprise that the bankers prefer the almost 300 pages of complex, loophole ridden regulations that the Volcker Rule requires over being required to provide ultra transparency.  With the Volcker Rule, they can use the loopholes to continue gambling.

The Volcker rule could cut profit at the biggest U.S. banks twice as much as earlier estimates if regulators take a strict stance on limiting proprietary trading, Standard & Poor’s said. 

“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue. 

Goldman Sachs Group Inc. (GS) and Morgan Stanley, which were the two biggest U.S. securities firms before converting to banks in 2008, stand to lose the most because they get a larger percentage of their revenue from trading than the other lenders, S&P said in the report. Regulators are unlikely to draft a final version of the rule until the end of 2012, S&P said. 

“Less strict rules would have a limited impact on banks’ earnings and business positions, so it’s unlikely that we would take any rating actions as a result,” S&P said in the statement. “Stricter rules could lead us to take negative rating actions on certain banks.”

In addition to Goldman Sachs and Morgan Stanley (MS), S&P included Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), PNC Financial Services Group Inc. (PNC), U.S. Bancorp, and Wells Fargo & Co. (WFC) in its analysis. Those eight banks earned a combined $70.5 billion in pretax profit in the first nine months of this year, according to company reports.

Section 619 of the Dodd-Frank Act, also known as the Volcker rule, limits federally regulated banks’ ability to make proprietary trades, or bets on their own behalf, and curbs their investments in private equity and hedge funds to 3 percent of Tier 1 capital. While proponents of the rule say it will help minimize risk-taking, executives at some of the banks say the rule is unnecessary. 

S&P said proprietary-trading restrictions could help make banks safer. 

“The implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk,” S&P said. “This risk mitigation could lessen revenue and earnings volatility, which we would view favorably.”