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December 9, 2013

US banks: Volcker rule

At the base of the Volcker rule is a sound principle – that federally insured deposits should be not be used for speculation. If banks want cheap funding from deposits, they must accept limits on what they can do with the money. Unfortunately, after three years of lobbying, wrangling and debating over the rule, there is the potential for a depressingly messy execution.

Using depositors’ funds to make complex investments – the sort that even bank executives struggle to understand – should be out. The Volcker rule aims to do that by prohibiting commercial banks from engaging in proprietary trading, and from owning or running hedge funds and private equity firms.

Over the past few years, the most blatant of these bank-owned risk-takers have been sold or dismantled. What remains are in grey areas – hedging and market-making. The desire for a rule specific enough to turn grey into black and white risks turning Volcker into a 1,000-page horror. Regulators have the responsibility of making the rule strict enough so banks cannot find ways to get around it but not so constraining that it squelches beneficial banking activities such as lending and promoting market liquidity.”

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Read full Financial Times Lex column post here

 
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