As the Senate Banking Committee hashes out its differences on financial regulatory reform, the creation (or not) of a Consumer Financial Protection Agency (CFPA) is the main focal point. But it isn’t the only issue left to be worked out.
Yesterday, the Obama administration officially submitted to Congress its proposal to implement the “Volcker rule,” which would bar banks from trading for their own benefits with federally insured deposits. The administration would also like to forbid any financial institution from owning more than 10 percent of the market share in the financial system (minus insured deposits). But the proposal seems to be going nowhere fast in the Senate:
– Sen. Chris Dodd (D-CT): I can’t write regulations, this is way beyond the competency of Congress.
– Sen. Bob Corker (R-TN): It is not helpful to the process for the administration to be putting out positions right now on financial regs, especially as it relates to the Volcker rule. It’s just not helpful.
While the Senate seems to have nothing but cool indifference toward the Volcker rule, others are not so dismissive. Rep. Paul Kanjorski (D-PA) called it a “fair, practical and foresighted proposal.” Five former Treasury Secretaries support the rule, saying that it’s “a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.” Former Citigroup CEO John Reed has endorsed it, saying that it would “limit the propogation of [bank] failures.”
Today, Citigroup’s current CEO, Vikram Pandit, also endorsed a separation between risky trading and commercial banking, saying that “banks should operate as banks, focused completely on serving their clients.” “I don’t believe banks should use capital to speculate that way,” Pandit said, when asked about the kind of trading the Volcker rule is meant to curb. Of course, Citigroup stands to benefit from the implementation of the rule, as it has already ditched many parts of the company that engaged in risky behavior, but still, Pandit is the first current CEO of a megabank to explicitly back the rule.
By not giving the Volcker rule much thought, the Senate is showing some short-sightedness and limiting itself to a reform bill that only aims to correct the problems of the last financial crisis. But now that all the big investment banks have converted into bank holding companies, they receive federal guarantees and cheap loans, while still engaging in the same trading practices as before the crisis. That means additional safeguards to correct potential problems with this setup are in order.
So as Paul Volcker himself said when questioned by Sen. Mike Johanns (R-NE), “I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you.”