Financial Stability News

News about financial stability, central banking and theory of money

Tag Archives: Volcker rule

Big banks are simply too big

Also investors may think so. As FT banking commentator Patrcik Jenkins notes in this post, banks are trading at very low book/values and investors may actually benefit from breaking up large conglomorate banks:

Shareholders appear to be coming to the view that banking conglomerates do not make economic sense. There are many factors subduing banks’ stock market values, including the eurozone crisis and global regulatory uncertainty. But another brake is investors’ fading faith in size for its own sake. Most western banks – especially the universal ones comprising retail and investment banking under one roof – are trading at a discount to the book value of their net assets.

This is a view that Andrew Haldane of the Bank of England also has voiced earlier, indicating that proposals for splitting trading and commerical banking actually may be in the banks best interest. A clean split – ala the Volcker rule – would then be preferable to a holding company solution as proposed by the UK Vickers commission. Time will tell which will be the choosen one.

Volcker and his critics

There has been quite some press recently on the Volcker rule, in part related to the deadline for comments last week. The Financial Times carried a comment from Volcker himself where he rejected the claims from some capitals (JP, CA, EU among others) that the rule would sap liquidity from their sovereign bond markets.Today a chairwomen from the Institute of International Bankers responds.

A complete run on the arguments for and against the Volcker rule is given by Simon Johnson (former Chief Economist of the IMF) in this recent NY Times post, which also includes several relevant references. He notes that if anything, the bankers are getting away cheaply in the proposed new regime, which isn’t even finished yet.

Among those that have submitted comments are also the Occupy Wall Street subsidiary “Occupy SEC”, which have provided a well balanced and constructive comment paper of 190 pages! According to this report, it has been accomplished as a huge workshop,  with some of the participants clearly being well informed about the intricacies of Wall Street. You can find their comment letter on their web site.

Small banks are good for the economy

This is a really interesting story about a guy who feels strongly that smaller banks are beautiful and is starting to invest on that basis. As Minsky  noted long ago, Community Development Banks (eller spare banker på godt norsk) are good for the economy, not Too-Big-Too-Fail banks.

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.

Japan and Canada warn on Volcker rule impact

Progress in implementing the Volcker rule in the US is slow, while the conservative government in the UK is rapidly moving along with its own version, published last year by the Independent Banking Commission. This article in the FT notes that other countries (notably Japan and Canada) are now getting cold feet about the indirect repercussions of stricter rules for proprietary trading in the US and UK.

They argue that prop trading provides much needed liquidity and forcing US banks to pull out would cut demand and add strains to the already stressed market.

The report by the US Treasury on implementation of the rules was not very specific, with several hundred open questions for hearings. It is a well known secret that neither the Fed nor the Treasury is favoring the rule. It remains to be seen if it will ever be implemented in the US. The UK, on the other hand seem closer to some sort of proposal. Not so surprisingly, given that their banking sector currently is > 500 % of GDP. They can ill afford another public bail-out.

Too-Big-To-Fail Banks Back on Senate Agenda

Bloomberg reports that the TBTF issues again is being addressed in the Senate. Senator Brown (D-Ohio) has earlier tried to limit the size of mega banks in the Dodd-Frank legislation, but failed then. Today there will be a  hearing in the Senate Senate Subcommittee on Financial Institutions and Consumer Protection to again address the issue. Among the witnesses will be Sheila Bair, former head of the FDIC and an outspoken critic of the large banks.

Also on the hill, yesterday there were hearings on the implementation of the Dodd-Frank bill. Chairman Johnsen noted that he in particular looked forward to progress report on the rule making for the Volcker rule. Not surprisingly, the financial industry, and the Fed and the US Treasury, think the proposal is not such a good idea. The web-cast from the hearings, including Fed governor Turello is posted here.