Former Federal Reserve Board chairman Paul Volcker, in comments to regulators, defended the need to restrict the risky trading activities of large banks, saying commercial bank proprietary trading is at odds with the basic objectives of financial reform. The comment period for the namesake Volcker Rule closed on Feb. 13, 2012.
“Proprietary trading of financial instruments…does not justify the taxpayer subsidy implicit in routine access to Federal Reserve credit, deposit insurance or emergency support,” Volcker wrote.
He added that proprietary trading activity, hedge funds and equity holdings “should stand on their own feet in the market place, not protected by access to bank capital, to the official safety nets, and to any presumption of public assistance as failure threatens.”
Volcker stated that restrictions on proprietary trading will also offer customers a “conflict of interest free platform,” where bankers focus exclusively on customer needs, and where all of the bank’s capital is committed in support of those customer activities.
Addressing the perceived burden of the Volcker Rule on smaller banking organizations, Volcker wrote that the management of those institutions “must understand the nature of the restrictions. However, consistent with effectively administering the law, oversight and reporting of those institutions may be less intrusive than that appropriate for active trading operations.”
A comment from the Conference of State Bank Supervisors highlighted the concerns faced by smaller institutions. The proposed law, the group wrote, “may lead to unforeseen and unintended compliance burden,” noting that even if an institution has no proprietary trading activity it must include in its compliance policies and procedures measures designed to prevent it from becoming engaged in activities prohibited or restricted by the rule.
Comments from the U.S. Chamber of Commerce focused on the economic impact of the rule. According to the association, the cost of capital will rise, many firms will be shut out of capital markets, and inhibited from accessing available bank lending, while companies may not be able to hedge risk in certain circumstances. “In short, the American engine of economic growth will be deprived of the fuel needed to operate,” the Chamber said.
In a 173-page joint comment from the Securities Industry and Financial Markets Association, the American Bankers Association, the Financial Services Roundtable and the Clearing House Association, the groups stated that “there is a delicate balance to be struck in proscribing proprietary trading while protecting financial markets and market participants, and the current proposal fails to strike that balance.