Stephen Foley: Volcker Rule is useless in tackling systemic risk
Stephen Foley is a former Associate Business Editor of The Independent, based in New York. He left in August 2012. In a decade at the paper, he covered personal finance, the UK stock market and the pharmaceuticals industry, and had also been the Business section's share tipster. Between arriving with three suitcases in Manhattan in January 2006 and his departure, he witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.
Saturday 14 January 2012
US Outlook: There are so many good reasons to hate the Volcker Rule, it is surprising that lobbyists against it have thrown up so many disingenuous objections, too.
The Volcker Rule, you will recall, is the ban on proprietary trading by banks in the US. It was championed by the former chairman of the Federal Reserve, Paul Volcker, and shoehorned into the Dodd-Frank Wall Street reform bill when anti-bank sentiment was at its height. Regulators are still trying to finalise the details of what will and won't be banned; one of the (many) reasons for banks' poor earnings performance is that they have scaled back their activities in anticipation.
There seems to be a last-minute attempt to have the rule scrapped, and I have heard a good half-dozen objections this week, most of them rather silly. For instance, lobbyists for venture capital want an exemption so that banks can still have VC arms and invest in hot start-ups or leveraged buy-outs. They claim tech companies will suffer. But every fund manager and his dog is hunting for outsize returns. VC can attract just as much as it deserves from these other sources.
Jerry del Missier, co-chief executive of Barclays Capital and head of the finance industry lobby group Sifma, was trying to drum up a diplomatic row over Volcker, too, criticising the fact that US Treasuries are exempt from the ban on proprietary trading. You are "naive", he said, if you don't think this will lead to retaliation from foreign governments.
It is true that the Canadians and Japanese have expressed some upset, but the notion that there is any shortage of liquidity in sovereign debt markets is ludicrous. Volcker might make for marginally higher costs in trading of the most illiquid debt instruments, but the effects of this will be felt disproportionately by the speculative traders who dash repeatedly in and out of these instruments, not by the businesses issuing the debt.
The real problem with the Volcker Rule is that it is incoherent, expensive and useless in tackling systemic risk. Regulators never wanted to have to try to define "proprietary trading" because they know it is impossible; banks are speculating with their own money even when they are performing their basic functions as market makers for their clients.
It wasn't banks' prop desks that caused the credit crisis. The problems brewed in the very market making activities (in the mortgage sphere) that Volcker exempts.
Some of the best bits of Dodd-Frank involve building firewalls between banks, so that the failure of one does not trigger the failure of more. The Volcker Rule is a messy distraction.
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