The Volcker Rule set to impact Hedge Fund Investments from Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Others

The Volcker rule, as it has come to be referred to, seeks to prevent financial institutions from gambling with taxpayer-insured funds. In the new financial reform act, the most significant part of the Volcker rule is steeped in ambiguity, but as it applies to hedge funds and private-equity investments, big banks appear overexposed. In the final version of the bill, the Volcker rule is not as large or as extensive as originally feared, but several banks stand to get hit pretty hard because of the limits on alternative investments and Tier 1 capital levels.

The rule will allow banks to continue buying and selling Treasury Department notes, along with limits on purchases of the Debt from Ginnie Mae, Fannie Mae, and Freddie Mac.

The tough decisions on implementation and hard limits has been taken out of the hands of Congress, and given to the regulators instead. As such, the impact of the changes brought upon by the Act is yet to be seen, since it’s hard to tell where the regulatory yardstick will ultimately land. However, one element of the rule is rather clear: Financial firms will have to divest any private equity or hedge-fund investments beyond 3% of Tier 1 capital.

RBC Capital Markets has noted SVB Financial will be hit hard from this. The California based bank had $247 million in venture capital and private equity investments as of March 31, representing about 30% of its Tier 1 capital. Depending on how much is required to be divested, a capital raising campaign is a near guarantee. Luckily for SVB and the rest of the industry, rumors are that the financial institutions will have 5 years to comply with this new regulation.

It seems that large banks will have to do the same, although to varying degrees. The data on Tier 1 Capital composition is not standardized, so analyzing immediate impact is difficult. However, it is expect that all of the largest banks will have to get rid of some alternative assets or present more cash to cover them.

Bank of America (NYSE: BAC) disclosed $13.5 billion worth of private-equity and hedge fund investments as of March 31, which represented 8.7% of its Tier 1 capital. JPMorgan Chase (NYSE: JPM) outlined $7.3 billion in private-equity assets alone, which represents 5.5% of Tier 1. Wells Fargo’s (NYSE: WFC) figures are less clear, but the bank seems to have $5.7 billion in such investments, representing 5.8% of Tier 1, and Goldman Sachs (NYSE: GS) held $68.5 billion, or 4.4% of Tier 1. Citigroup (NYSE: C) oddly comes in at the low end of the pack , holding just $1.3 billion in hedge funds and private equity., which represents 1.1% of its Tier 1, which appears already compliant with the new regulations.

RBC believes most banks affected by the change will start divesting “as soon as possible”, even though they have a few years to work on this.