How Much Would the Volcker Rule Cost?

A few weeks ago President Obama proposed a plan designed by former Fed Chair Paul Volcker that would essentially return the nation to the Glass-Steagall wall of separation between commercial banks and investment banks. This proposal, known now as the Volcker Rule, is projected to have a significant impact on the viability and profitability of Wall Street’s biggest firms.

Just how big an impact is the question everyone is trying to figure out. Big financial institutions like Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and others would have to divide their operations. This would mean investment businesses would cease to have the capital support of depository resources. It would also impact various types of trading that currently generate significant revenue.

Last week the NYT’s Dealbook blog noted that industry estimates right now are that Goldman has the most to lost, and Morgan Stanley and JPMC would be sitting a lot prettier.

Citigroup estimates that the Volcker Rule would cost Goldman $4.5 billion in revenue based on its 2010 estimates, translating to a $1 billion drop in profit. Analysts at JPMorgan Chase said the Volcker Rule would knock about $4.67 billion off Goldman’s future revenue stream, but they came to their projection a different way, estimating that the firm would experience a 20 percent decrease in its overall trading revenue.

Loss estimates for Morgan Stanley range from a 3 percent loss in profits to 15 percent. But Morgan Stanley and JPMC have already ended large portions of their trading that would be banned by the Volcker Rule. Interestingly, their recovery has been a little slower than Goldman’s. Whether that is a sign of things to come is unknown. But largely, the reform effort should be focusing on a principle of institutional responsibility for failure, instead of trying to ban certain practices to create the illusion of systemic stability.