Former Federal Reserve Chairman Paul Volcker, speaking in support of the Dodd-Frank Act rule that bears his name, said it is impossible for banks to handle the potential customer conflicts presented by trading activities.
“Imposing on those essential banking functions a system of highly rewarded – very highly rewarded – impersonal trading dismissive of client relationships presents cultural conflicts that are hard – I think really impossible – to successfully reconcile within a single institution,” Volcker said in testimony prepared for a Senate Banking subcommittee hearing in Washington.
The panel is meeting to discuss risks posed to the by the size and interconnectedness of financial institutions. U.S. lawmakers and regulators have been looking at ways to reduce risk in the financial system since the 2008 economic crisis, when Wall Street’s largest banks required a $700 billion taxpayer bailout.
“The risk of failure of ‘large, interconnected firms’ must be reduced, whether by reducing their size, curtailing their interconnections, or limiting their activities,” Volcker said in his remarks.
Volcker, who served as an adviser to President Barack Obama, said the Dodd-Frank rule that bars firms from trading on their own account is an “important step” to address conflicts of interest, as well as “compensation practices and, more broadly, the culture of banking institutions.”
The Volcker rule is one of the most contentious parts of the Dodd-Frank law that was drafted to help prevent another financial crisis. It is intended to reduce the chances that banks will put federally insured depositors’ money at risk. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley have argued that it is so broad and poorly defined it will force them to shed business lines and could actually increase risks for their clients.
The Fed, Securities and Exchange Commission and Federal Deposit Insurance Corp. are among the regulators drafting the final rule. The initial 298-page proposal was released in October and criticized by groups on both sides of the issue. Regulators last month announced that banks would have a “full two-year period” to implement the new rule, which is scheduled to go into effect on July 21.
Volcker also said regulators should consider structural changes to money-market funds and impose stronger capital requirements and oversight.
Concern over money funds, once seen as among the safest of investments, grew after the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered a broader run that contributed to a freeze in global financial markets. The SEC adopted rules in 2010 that introduced liquidity minimums, average maturity limits and new disclosure requirements.
Money-market funds have fought any additional regulation. Christopher Donahue, the chief executive officer of Pittsburgh- based Federated Investors Inc., the third-biggest U.S. money-fund provider, said Jan. 27 that his firm would sue the SEC if it went forward with a proposed rule.
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