The approval of the Volcker rule last week by five regulators was the culmination of years of work. As those agencies offer compliance and enforcement guidance, U.S. Sen. Michael Crapo (R-Idaho), critical of the lack of economic analysis that accompanied the final rule, is demanding they carefully consider the affect it will have on community banks and address overlapping areas of supervision and enforcement.

Crapo detailed his concerns in a letter to the Federal Reserve's Board of Governors, Securities and Exchange Commission, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation on Wednesday. Those agencies approved the Volcker rule – which bans deposit-funded proprietary trading by banks, while allowing traditional hedging and market-making activities – on Dec. 10. He cites “unintended consequences” of the 900-plus page rule and urges regulators to offer additional guidance.

The affect on community banks was detailed as a primary concern. Although regulators sought to assure small- and mid-sized entities they would not be subject to market disruptions or “have to implement new, costly compliance programs,” Crapo says that many of them were “taken by surprise” by provisions in the final rules that pertain to bank ownership of collateralized debt obligations and loan obligations.The final Volcker rule's definition of “covered fund” appears to include these instruments, prohibiting banks from having an ownership interest in these products to the extent that they are comprised of anything other than loans. As a result, some community banks are already divesting these holdings, a costly endeavor.

Forthcoming guidance should help these banks comply with the Volcker Rule “without having to divest these holdings at an exorbitant loss or having to spend millions of dollars to be in compliance,” Crapo says.

He also writes that it is also unclear how the multiple agencies involved with the rule will coordinate supervision and enforcement. For example, the SEC has jurisdiction over market-making activities, but, as a practical matter, prudential banking regulators typically provide front-line oversight of trading activity on a daily basis.

Crapo frets that the agencies “have not properly considered how this dual oversight will function in practice without causing additional confusion and uncertainty” and seeks a detailed explanation of their intended approach.“These unintended regulatory consequences and ambiguous coordination of supervision and enforcement could have been readily addressed in a re-proposal before the rules became final,” he added. “Unfortunately, that did not happen.”