Financial Stability News

Flashing news about financial stability and central banking

For and Against the Volcker Rule

New York Times carries a story today that the so-called Volcker rule, that would bar US banks for carry out proprietary trading, could seriously harm the liquidity in foreign bond markets and drive borrowing cost up. This is not something the European countries want just now. Even Canada is upset and claims the rule would be a breach of the North-American free trade agreement.

The rules are out for hearing, based on a rather inept proposal from the Treasury with as many open questions as there are pages (around 300). This prompted one of the sponsors of the bill, senator Merkley, to tell the regulators recently to do a much better job of drawing up clear, bright lines so as to avoid another repeat of the financial crisis of 2008. In his words, the Volcker rule is about taking deposit-taking, loan-making banks out of the hedge fund business. Hedge funds should be able to make bets, but not with taxpayers money.

If you want another view, look up this post by our friend Doug Elliot at Brookings. In a testimony before Congress he claims the the Volcker rule is fundamentally flawed. This is basically because the current proposals try to regulate on the basis of (speculative) intent, which according to him, will be near impossible. He also notes that the blurring between traditional lending and securities lending have made the securities business an integral part of banking. Preventing banks from holding securities inventories would be paramount to ban banking, according to him.

With the FDIC, Fed and Treasury all against the new regulation, and now foreign government adding pressure to delay, my guess is it will take some time before the Volcker rule is enacted in the US.

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