Volcker Rule debate intensifies

It's unlikely that the rule will be passed into law in its entirety.

By Trefis Feb 20, 2012 10:59AM
Image: Businesswoman and businessman (© Eric Audras/PhotoAlto Agency RF Collections/Getty Images)It looks like the battle between the proponents of the Volcker Rule and the country's biggest banks will go on for quite a while.  

The banks are clearly in no mood to give up without a fight, given how much the proposed regulations would impact their businesses. The Securities and Exchange Commission (SEC) received more than 16,000 comments regarding curbs on proprietary trading by banks. 

The country's biggest banks have been vociferous about their opposition to the rule. It consistently figures at the top of the list of laws they have lobbied against in the recent past (see Wells Fargo Spent Most Among Banks Lobbying). The largest investment banks, like Morgan Stanley (MS) and Goldman Sachs (GS), stand to be hit most from a ban on proprietary trading.

Morgan Stanley Stock Break-Up

The changes proposed by the Volcker Rule stem from the fact that many banks engage in highly risky trades in securities, derivatives and other financial instruments for their own profit -- often backed by the benefits of deposit insurance and Federal funding. This is perceived as an unnecessary and avoidable burden on taxpayers, who have little to gain (at least directly) from banks' bulked-up trading revenue figures, but much to lose as their own money is potentially at risk when market conditions deteriorate.

Former Federal Reserve Chairman Paul Volcker, after whom the rule is named, extended his full support to it in his comment on the SEC website earlier this week.

Banks, on the other hand, claim that banning all proprietary trading would be counter-productive. Firstly, a complete ban would make it more difficult for them to perform their market-making role efficiently, and would result in attempts by companies to raise capital more expensive. Secondly, banks argue that as the ban also includes hedging operations, it would actually increase their risks, as they will not be able to hedge their exposure.

Comments from representatives at Morgan Stanley against the rule can be found here, while those from Goldman's chief of staff are provided here.

It must be noted that most of the banks have already shut down or spun off parts of their proprietary trading operations, or are in the process of doing so, in response to the Volcker Rule (see Citi Continues Shedding Prop Trading Units as Volcker Rule Looms). But they continue to do everything in their power to keep the rule at bay. Even if it is to be enforced, they intend to limit the extent of the bans proposed.

The Volcker Rule is slated for implementation in July this year. While it is unlikely that it will be passed into law in its entirety as it stands now, the sheer volume of comments received for and against it begs for more consideration of the impact of each proposed change on the general public as well as the country's banking system.

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Feb 20, 2012 3:53PM

Well Ice Fisher...


  • the prez cant keep approving rules to curb the business of banks. how many times can they be charged and punished for the same offense

....Chicago politicians...for the most part...don't see it that way!

Feb 20, 2012 12:09PM
the prez cant keep approving rules to curb the business of banks. how many times can they be charged and punished for the same offense, this is nothing more than double, triple or maybe quadruple jeopardy.
Feb 20, 2012 11:38AM
 It's sure seems like the banks want to be self regulated which is why we had the financial crisis in the first place. Banks, consumer versus investment, should be separated in two categories so that p]one can serve investment activities and the other more traditional "banking" activities. The regulation and risks of each category could then be more appropriated constructed to avoid and limit future risks. 
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