Tags: Volcker | rule | bank | Dodd-Frank

Reporter Previews Volcker Rule Action

By    |   Tuesday, 10 Dec 2013 01:51 PM

On Dec. 3, Wall Street Journal reporter Scott Patterson was interviewed on C-SPAN's Washington Journal by Pedro Echevarria about the so-called "Volcker rule," a set of regulations that is expected to be issued on Dec. 10 by five financial and market regulators.

Before taking questions from the audience, Patterson explained that the rule, conceived in 2009 by former Federal Reserve Chairman Paul Volcker, was incorporated into the Dodd-Frank Act.

The agencies scheduled to act are the Federal Reserve, the FDIC, the Comptroller of the Currency — the banking regulators — and the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) — the market regulators. The purpose of the rule is to reduce the risk of another financial crisis episode by prohibiting banks from trading securities for their own account, often referred to as "proprietary trading."

Volcker and other advocates of the rule argue that it is not appropriate that trading activities be conducted by institutions that are supported by the federal safety net. However, Dodd-Frank also provided that such activities would be permitted when their purpose is to hedge or to make markets for customers.

Patterson asserted that the normal activities of banks serve the economy and that it is untrue that all they do is gamble and party.

While industry lobbies have protested that these activities did not contribute to the 2008 crisis, Patterson said that trading in risky derivatives based on mortgage-backed securities that declined in value along with housing prices caused a $10 billion loss at Morgan Stanley and that the firm would have failed if it had not been rescued by the government.

Moreover, in Patterson's view, the activities of traders within banking organizations and the compensation traders received fostered a culture of risk that rippled through banking organizations.

Patterson described the task of writing the regulation as "Herculean" and the negotiations among the regulators with industry lobbyists as opaque. He indicated that the final product is likely to be close to 1,000 pages. (Another report said the preamble to the rule is 900 pages and the rule itself about 70 pages.)

It is a cliche to say that the objective of the regulators and Congress is to "strike the right balance" between controlling risk and constraining the work of banks so that the economy suffers as companies are unable to obtain services that facilitate the hedging of agricultural production and the ability of companies to raise capital by issuing stocks and bonds.

Patterson reported that rumors that two supporters of the rule, CFTC Chairman Gary Gensler, and SEC Commissioner Kara Stein, a former staffer of the Senate Banking Committee, have recently sought to strengthen the rule against industry efforts to weaken it by creating loopholes.

I have been pessimistic from the outset that the Dodd-Frank rule would ever be implemented. With respect to the Volcker rule, the creation of sweeping exceptions for hedging and market making invite mischief.

In any case, after a comment period, expected revisions, and possible court challenges, the rule would not take effect until at least mid-2015.

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Robert-Feinberg
On Dec. 3, Wall Street Journal reporter Scott Patterson was interviewed on C-SPAN's Washington Journal by Pedro Echevarria about the so-called "Volcker rule," a set of regulations that is expected to be issued on Dec. 10 by five financial and market regulators.
Volcker,rule,bank,Dodd-Frank
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2013-51-10
Tuesday, 10 Dec 2013 01:51 PM
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