Predicting a long road ahead before the U.S. financial system is fully healed, former Federal Reserve chairman Paul Volcker told an economics roundtable Friday that proposed higher bank capital standards would be insufficient to fix structural problems.
"When a bank goes bad, it doesn't make much difference how much capital it has," Volcker said in remarks at the Changing Fortunes economic roundtable in Calgary. He added, however, that he hoped the higher capital requirements being contemplated by international banking regulators in Basel would improve banks' stability.
Volcker, now chairman of President Obama's Economic Recovery Advisory Board, said the problem of "too big to fail" banks has not been resolved, and he suggested, "There should be some rules … maintaining some separation between the central commercial banks and trading activity, proprietary activity in the financial markets."
The so-called Volcker Rule in the Dodd-Frank financial reform law is aimed at limiting commercial banks' ability to make trades and other financial deals on their own behalf rather than for clients.
The U.S. law against combining commercial and investment banking and proprietary trading activity was repealed in 1999 as part of deregulatory legislation.
Volcker said a full reform of the U.S. and world financial systems would be a "tremendous job" that would take three to six years.
Part of the healing process for the global economy, he added, must include resolving the trade imbalance between the U.S. and China. Low savings by U.S. consumers and high savings by Chinese consumers has led to "unsustainable" imbalances, he said.
Meanwhile, Volcker said, it will take several years for the U.S. to reach peak production, so the economy will have low growth uncharacteristic of past recoveries. The U.S. financial system is "working on two-cylinders," he said, and the U.S. mortgage market is essentially a "subsidiary of the U.S. government."
