Are you ok with your bank playing roulette with your deposits? Yes? No? Well, today is the last day to speak up and be heard
According to the Federal Register (linked above), the Volcker rule (previously)
(written into the Dodd-Frank Wall Street Reform and Consumer Protection Act) would restrict commercial banks when engaging in proprietary trading
and "maintaining certain relationships with hedge funds and private equity funds".
Why is proprietary trading such a problem? Well, to hear the rule's namesake, Former Federal Reserve Chairman Paul Volcker
, describe it, "such speculative activity played a key role in the financial crisis."(link
) This view is support by research
"...the Political Economy Research Institute at the University of Massachusetts pointed out 'risky proprietary investments by investment banks, along with trading for clients whose decisions were influenced by these banks, was one of the main forces that sustained upward pressure on securities prices in the bubble…Indeed, by running large trading books, banks had inside information on client trading patterns and could use that information to front-run, and thereby help sustain market trends.'”
American Public Media's Marketplace
compared such an arrangement as being similar to running a casino out of the back of your house
(yt) with banks gambling their depositor's money. The fear is, as it was before, when one casino loses (and one will, sooner or later
) the losses are so big that the whole system
Now, the language in the Dodd-Frank Act would definitely limit bank's private-fund investments to 3% of capital. The issue being heard is how to enforce the limit, how to regulate. Former IMF Chief Economist Simon Johnson notes that there is a difference of opinion within the group being tasked to determine enforcement, the Financial Stability Oversight Council
(FSOC). "On one side is the view that compliance should be monitored only through periodic existing supervision and some spot checks...that the industry will follow instructions and only needs a moderate degree of broad-brush enforcement." Meanwhile, "[o]n the other side is the view that enforcement should be more assertive and based on real-time access to detailed trading data. The thinking here is that regulators would need the ability to look at transaction data to understand what is really going on." Johnson argues, "Why not do both?
" Volcker himself seems to agree, with some noting
his worry that "narrow or prescriptive rules would invite gamesmanship on the part of banks and could allow firms to evade the rule's intent".
That same WSJ article points out that, "[a]lready, some banks and their lobbyists are seeking to sway regulators and encourage them to narrowly define certain types of trading activities, according to government officials." It doesn't stop with trying to sway regulators. Only a few days ago, JPMorgan Chase signed a deal to acquire a controlling stake in Gavea Investimentos, a $6 billion hedge fund founded by the former head of the central bank of Brazil. (link
) Such behavior in the face of impending regulation might be explained by the close associations the financial industry has with the US Legislature. For example, Alabama Republican Spencer Bachus who, back in July
, "unsuccessfully sought to amend the bank reform legislation with a provision that would have prohibited the Volcker rule’s implementation unless other countries adopted similar measures. Bachus, who raised $218,000 in 2009 and 2010 from the securities and investment industry, is likely to push to regulators to limit the Volcker rule’s impact."
Today, in the aftermath of mid-term elections, Bachus is considered to be the a leading candidate for chairman of the House Financial Services Committee
. This may help explain why Bachus feels empowered enough to fire off a letter to the FSOC
, asserting that the Volcker rule will “impose substantial costs on the American economy and market participants” with “doubtful” benefits. “Depending on how US regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from US banks to banks based abroad”. The article also notes that Mr Bachus also expressed concern that shareholders of Goldman Sachs and JPMorgan Chase will be hurt because the banks will be less profitable. Now, there is no guarantee that Bachus will chair the House Financial Services Committee, but the alternative candidate
seems no more inclined to support stronger regulation.
But sorting all of that out is will take time. In the meanwhile, November 5th is today and it's the last day for American citizens to voice their opinion on how tough the Volcker rule should be. Mike Konczal, a fellow at the Roosevelt Institute
, exhorts citizens to write in, "You may not have a lobbying staff, you may not get your calls returned from Senators within minutes, you may not be running attack ads through slush funds connecting a dozens front groups, but you can have your voice heard right here in this comment period." Clicking right here
will take you to the proper comment page.