US Outlook: Traders expected US bank shares to rise once Congress finalised its Wall Street reform Bill, since the uncertainty over the sector would at last be lifted, and they duly did yesterday. But the uncertainty about the sector has not really been lifted at all.
For starters, there is confusion over what effects spring from the flurry of last-minute compromises. Yes, there is a "Volcker rule", sort of, but instead of banning proprietary trading and investments in hedge funds and private equity, it limits them to 3 per cent of a bank's capital. Yes, there is a requirement to push derivatives trading into a separately capitalised subsidiary, but there will be exemptions for standard derivatives used to hedge the risks banks take on when dealing with clients. Drawing a line between proprietary trading and client-centred business is not easy; the business of definition has been kicked down to regulators.
It is also not clear where the $20bn levy on the industry, sprung on us late on Thursday, will fall most harshly.
Meanwhile, although the Bill orders greater capital requirements for the industry, the real business of reducing risk falls to the Bank for International Settlements and its Basel III agreement, which is being watered down as we speak. Those rules will take months to finalise and years to introduce.
Wrangling over derivatives and the Volcker rule, which I have always regarded as "non-core" to the issue of too-big-to-fail and the credit crisis, have obscured the really big achievements of this reform Bill: a new consumer watchdog to counter predatory lending and protect underwriting standards, and "resolution authority" to wind down frighteningly interconnected financial firms.
The Republican Jeb Hensarling scoffed that "there are probably three unintended consequences on every page of this Bill" – and he is surely right. We have moved decisively in the right direction, but that is not the same thing as saying the future is clear.