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June 11, 2012

Volcker rules (on bank regulations, that is)

Like a lot of people, Paul Volcker is disgusted with the nation’s banking system. The former Federal Reserve Board chief isn’t happy that so much business is concentrated in a handful of giant banks that he says are too big to properly manage. He’s alarmed that these institutions used their government-insured deposits to gamble on super-risky securities. He’s enraged when they exploit long-term client relationships to make a fast buck on their trading desks. In short, says the legendary central banker who broke the Great Inflation of the 1970s, the nation’s big banks have lost any sense of a moral compass.

“The trading mentality, which I think was going through [recently] at JPMorgan, is the antithesis of the kind of ethical approach and balance” that must be expected from banks, he told a gathering of Columbia Law School students and faculty last week.

Far-reaching reform

Now Mr. Volcker is about to have something done about it. Next month, federal regulators are expected to formally adopt the Volcker Rule, a part of the 2010 Dodd-Frank financial reform law that almost completely bans banks from using their own capital to make risky trades. The rule’s underlying idea is that government-insured deposits should never again be used to finance the most speculative activities of Wall Street. For years, banks have been furiously lobbying to weaken the rule, which is perhaps the most far-reaching financial reform to come out of the Obama administration.

“His credibility and prestige are unmatched by anyone in banking, and I’m quite sure if his name wasn’t attached, the rule would have no chance,” said Dennis Kelleher, chief executive of consumer-advocacy group Better Markets.”



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