Clampdown on Wall Street

Four years after it was first proposed, US regulators have approved the Volcker Rule.

Named after the former chairman of the US Federal Reserve, this bans banks from making bets with their own money – proprietary (prop) trading – in order to reduce the likelihood of Wall Street’s big players engaging in overly risky activity and requiring a bail-out.

What the commentators said

What pointless “crowd-pleasing tokenism”, said Allister Heath in City AM. Property and small business lending “have sunk far more banks than trading ever has”. That certainly applied in the global crisis, when loan losses vastly outweighed trading losses. “Proprietary trading did not cause the recession or the bail-outs.”

Still, as the FT pointed out, implicit state guarantees for big banks and lax regulation of prop trading helped fuel the credit bubble. But turning the Volcker rule into a workable law has proved “fiendishly difficult”. A key issue is deciding what constitutes prop trading and what is market making, whereby a bank buys and sells assets for clients.

For instance, said The Daily Telegraph, the process of making a market, or establishing a price, for a client will often involve the firm holding a certain amount of the product on its own balance sheet.

“How do you know whether a certain amount of overstocking might amount to no more than an optimistic view on trading volumes rather than an outright bet on… the product’s price?

Practical difficulties notwithstanding, said David Reilly in The Wall Street Journal, the Volcker rule will be worthwhile if it marks a first step towards stopping banks having their fingers in so many pies that they become too big to fail.

Why, for instance, are they allowed to run their own fund management arms, when implicit government backing gives them an advantage over stand-alone firms and encourages risk taking? And shouldn’t other companies, rather than banks, handle market making? We must get “banks back to being banks”.

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