Federal Reserve Official Calls For Tougher Volcker Rule

A top Federal Reserve official is calling on regulators to prevent banks from circumventing a provision in the Dodd-Frank financial reform bill that aims to prevent the kind of risk-taking that led to the financial crisis. In a speech to graduate students in Colorado, Fed Gov. Sarah Bloom Raskin criticized the Volcker Rule — which prohibits proprietary trading by federally insured banks and their affiliates — for not going far enough.

Raskin told students that she voted against a regulatory measure because it undermines the Volcker rule’s goal to prevent banks enjoying access to government emergency lending from participating in dangerous speculative trading:

I was concerned that, as proposed, the guard rails were too broad and would allow banks to be able to go too far off the road. Further, I was concerned that the guard rails as crafted could be subject to significant abuse–abuse that would be very hard for even the best supervisors to catch. [...] I feel it is very important that the guard rails be strong and be set very close to the road because of the potentially severe dangers of, and costs associated with, proprietary trading by institutions that have access to the federal safety net.

Raskin goes on to argue that, when it comes to federally insured banks, the high level of liquidity brought on by proprietary trading has no public benefit:

Indeed, proprietary trading involves buying and selling purely for speculative purposes that have little to do with a true assessment of a financial position’s underlying value. Price discovery actually is impeded by this hyper-liquidity that is introduced by such speculation. This hyper-liquidity, motivated by nothing more than expectations of short-term price movements, creates inefficient subsidies to buyers and sellers with no compelling public benefit. [...] In other words, certain capital market activities for federally insured banks should not be supported by vast amounts of public and private expenditure.

The Volcker rule does not ban all proprietary trading. Instead, it shifts the practice to conventional banks, hedge funds, and other market participants. The notion that ending proprietary trading among “Too Big To Fail” banks will impact overall market liquidity is false, according to Raskin.

Nonetheless, banks have spent the better part of the last two years successfully lobbying Congressional Republicans, and the Volcker Rule has already been watered down so much that the measure’s namesake, former Fed Chair Paul Volcker, says he doesn’t like it.

– Steven Perlberg