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Sunday 7 February 2010
Stop big banks’ risky trades, urges Volcker
White House economic adviser Paul Volcker on Tuesday took to Congress his call to curb risky investing by big banks, warning that his soul would haunt lawmakers when the next banking crisis hits if they did not heed him now.
Not having trading limits will lead to another crisis, he warns Senate panel
Reuters 04 February 2010
(WASHINGTON) White House economic adviser Paul Volcker on Tuesday took to Congress his call to curb risky investing by big banks, warning that his soul would haunt lawmakers when the next banking crisis hits if they did not heed him now.
The 82-year-old former Federal Reserve chairman, whose star is rising in the Obama administration, faced questions about the White House’s latest and far-reaching proposals for a crackdown on the banking industry.
President Barack Obama stunned financial markets in late January by calling for new limits on banks’ ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.
Mr. Volcker, considered a sage of monetary policy and a crusader for tighter regulation, conceded such a move would not have prevented the debacles at AIG and Lehman Brothers.
But he said not adopting trading limits would lead to another crisis in the future.
If proprietary trading is not curbed, Mr. Volcker told the Senate Banking Committee, ‘I may not live long enough to see the crisis, but my soul is going to come back and haunt you.’ Analysts have speculated about exactly what would be off-limits if Congress adds the proposal to a sweeping package of financial regulatory changes that is still being debated.
Some see a blurred line between proprietary trading and market-making that helps customers. But Mr. Volcker disagreed.
‘Bankers know what proprietary trading is and is not. Don’t let them tell you any different . . . I don’t think it’s so hard,’ Mr. Volcker told lawmakers pressing for a clearer idea of where the regulatory lines would be drawn.
Treasury Deputy Secretary Neal Wolin, who testified alongside Mr. Volcker at the hearing, provided few new details.
Under the Obama proposals, banks could not establish or maintain a separate trading desk, capitalised with their own resources and unrelated to customer business, Mr. Wolin said.
That could mean barring banks from using such trading desks to speculate on the prices of oil, gas or equity securities, he said, adding that the restrictions should apply to all banks, including US operations of foreign banking firms.
Senator Christopher Dodd, the Democratic chairman of the committee, said he strongly supports Mr. Obama’s proposals.
Senator Richard Shelby, the panel’s top Republican, said he was ‘quite disturbed’ by Mr. Obama’s proposals being ‘air dropped’ into the financial regulation debate, which is more than a year old. But Mr. Shelby said he was willing to consider them.
Senator Bob Corker, also a Republican, questioned the need to crack down on proprietary trading at commercial banks, saying that firewalls already exist within bank holding companies to protect deposit-based activities.
Despite the firewalls, Mr. Wolin said, banks that do proprietary trading enjoy a cheaper cost of capital because of the taxpayer backing of the deposit-funded sides of their business models, which he said is unfair and should end.
In a sign of how the so-called ‘Volcker rule’ may already be having an impact, people familiar with the matter said on Monday that JPMorgan Chase may be rethinking its acquisition talks involving RBS Sempra, a joint venture of Sempra Energy and Royal Bank of Scotland.
The rethinking may be motivated by possible limits on proprietary trading, the sources said.
Mr. Volcker - whose tight-money regime broke the back of inflation when he was Fed chairman in the early 1980s under Presidents Jimmy Carter and Ronald Reagan - also wants banks to sever ties to hedge funds and private equity ventures.
‘What I want to get out of the system is taxpayer support for speculative activity,’ Mr. Volcker said.
A second hearing is set for today to hear from executives of JPMorgan and Goldman Sachs.
Deep divisions remain among committee members over issues such as managing systemic risk, bank supervision and consumer protection. Mr. Obama’s latest proposals complicated the talks.
The House of Representatives approved a bill in December that called for the biggest regulatory changes since the Great Depression, but the ‘Volcker rule’ was not included.
Mr. Obama also called for a new cap on banks’ market share based not only on deposits, which are already capped, but also non-deposit funding.
Mr. Volcker said international consensus on appropriate actions to restrict banks’ activities is an attainable goal.
2 comments:
Stop big banks’ risky trades, urges Volcker
Not having trading limits will lead to another crisis, he warns Senate panel
Reuters
04 February 2010
(WASHINGTON) White House economic adviser Paul Volcker on Tuesday took to Congress his call to curb risky investing by big banks, warning that his soul would haunt lawmakers when the next banking crisis hits if they did not heed him now.
The 82-year-old former Federal Reserve chairman, whose star is rising in the Obama administration, faced questions about the White House’s latest and far-reaching proposals for a crackdown on the banking industry.
President Barack Obama stunned financial markets in late January by calling for new limits on banks’ ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.
Mr. Volcker, considered a sage of monetary policy and a crusader for tighter regulation, conceded such a move would not have prevented the debacles at AIG and Lehman Brothers.
But he said not adopting trading limits would lead to another crisis in the future.
If proprietary trading is not curbed, Mr. Volcker told the Senate Banking Committee, ‘I may not live long enough to see the crisis, but my soul is going to come back and haunt you.’ Analysts have speculated about exactly what would be off-limits if Congress adds the proposal to a sweeping package of financial regulatory changes that is still being debated.
Some see a blurred line between proprietary trading and market-making that helps customers. But Mr. Volcker disagreed.
‘Bankers know what proprietary trading is and is not. Don’t let them tell you any different . . . I don’t think it’s so hard,’ Mr. Volcker told lawmakers pressing for a clearer idea of where the regulatory lines would be drawn.
Treasury Deputy Secretary Neal Wolin, who testified alongside Mr. Volcker at the hearing, provided few new details.
Under the Obama proposals, banks could not establish or maintain a separate trading desk, capitalised with their own resources and unrelated to customer business, Mr. Wolin said.
That could mean barring banks from using such trading desks to speculate on the prices of oil, gas or equity securities, he said, adding that the restrictions should apply to all banks, including US operations of foreign banking firms.
Senator Christopher Dodd, the Democratic chairman of the committee, said he strongly supports Mr. Obama’s proposals.
Senator Richard Shelby, the panel’s top Republican, said he was ‘quite disturbed’ by Mr. Obama’s proposals being ‘air dropped’ into the financial regulation debate, which is more than a year old. But Mr. Shelby said he was willing to consider them.
Senator Bob Corker, also a Republican, questioned the need to crack down on proprietary trading at commercial banks, saying that firewalls already exist within bank holding companies to protect deposit-based activities.
Despite the firewalls, Mr. Wolin said, banks that do proprietary trading enjoy a cheaper cost of capital because of the taxpayer backing of the deposit-funded sides of their business models, which he said is unfair and should end.
In a sign of how the so-called ‘Volcker rule’ may already be having an impact, people familiar with the matter said on Monday that JPMorgan Chase may be rethinking its acquisition talks involving RBS Sempra, a joint venture of Sempra Energy and Royal Bank of Scotland.
The rethinking may be motivated by possible limits on proprietary trading, the sources said.
Mr. Volcker - whose tight-money regime broke the back of inflation when he was Fed chairman in the early 1980s under Presidents Jimmy Carter and Ronald Reagan - also wants banks to sever ties to hedge funds and private equity ventures.
‘What I want to get out of the system is taxpayer support for speculative activity,’ Mr. Volcker said.
A second hearing is set for today to hear from executives of JPMorgan and Goldman Sachs.
Deep divisions remain among committee members over issues such as managing systemic risk, bank supervision and consumer protection. Mr. Obama’s latest proposals complicated the talks.
The House of Representatives approved a bill in December that called for the biggest regulatory changes since the Great Depression, but the ‘Volcker rule’ was not included.
Mr. Obama also called for a new cap on banks’ market share based not only on deposits, which are already capped, but also non-deposit funding.
Mr. Volcker said international consensus on appropriate actions to restrict banks’ activities is an attainable goal.
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