Regulators, politicians, bankers, and former Federal Reserve Chairman Paul Volcker himself are all searching for a simple, easy to understand, yet effective way to implement the Volcker Rule that is consistent with a safe and sound banking system. We agree and believe we have a solution that should be of interest to all concerned.
The Volcker Rule, which is part of the Dodd-Frank financial reform law, is intended to impose strict limits on banks engaging in "proprietary trading" – i.e., betting the bank's capital by significant speculative trading in financial instruments. Congress, as usual, gave general direction to the regulators to figure out how to implement the concept.
The regulators' proposed rulemaking on the Volcker Rule is a whopping 298 pages of complexity that is not only difficult to understand but nearly impossible to monitor and regulate. There is a better way.
We should note there is no evidence that proprietary trading caused or even contributed to the recent financial crisis. But like many financial products, especially loans, proprietary trading indeed has risk. This risk should be carefully and intelligently monitored and regulated.
The question regulators are trying to answer is this: Is the risk of holding an inventory of securities to enable customers to readily buy or sell securities through a bank reasonable, or is it so excessive that changes in the market price of that inventory could put the institution in serious jeopardy?
See the full BankThink piece "How to Simplify the Volcker Rule"