25 June 2018

Financial Times: Steer clear of diluting the Volcker rule and repeating mistakes

Under the regulation named after Paul Volcker, banks and their affiliates cannot take big trading positions unless they are making markets for their customers, hedging their risks, or engaging in other “permitted activities”. Despite Wall Street’s claims to the contrary, the existing rules are clear and easy to follow. In fact, the banks have been doing that for years.

But the big Wall Street banks have been arguing, even before the Volcker rule was finalised in 2013, that it would make it harder for them to serve their customers’ needs and would drive up trading costs. They claim the rule would make them less profitable and hurt the overall economy. They even warn that the rule would cause banks to collapse in another recession.

None of that has proved to be true.

Trading costs in most asset classes have fallen dramatically since the rule was enacted. The big Wall Street banks are more profitable than ever. In May, the Federal Deposit Insurance Corporation reported that US bank profits rose $56bn in the first quarter, up 27.5 per cent from a year earlier.

Relaxing the Volcker rule will not help community banks or credit unions, which generally do not engage in the kind of trading and other activities that the regulation restricts. This debate is about the biggest global banks that take the biggest risks.

Rather than ensure that banks continue banking, US regulators are moving to reopen the casino. They cannot overturn the statutory ban on banks trading with their own money, so they are finding a way around it: they plan to change the definition of “proprietary trading”, which would allow many previously prohibited risky bets. They are also softening the required bank compliance regimes.

The overall objective of these proposals is clear: to gut the Volcker rule. That is a mistake. US families and businesses should not be forced to endure another financial crisis borne of regulators loosening rules that were custom-designed to protect them from big banks’ bets. Do not bring back the bad old days.

Full article on Financial Times (subscription required)

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