Ever since it was first proposed, the financial services industry has launched a withering assault on the Volcker rule, a regulation meant to rein in the ability of banks to gamble with their customers’ deposits. The banks were able to water the rule down before it was passed into law — thanks in no small part to Sen. Scott Brown (R-MA) — and have now submitted a heap of comments to the regulators charged with implementing the rule, in hopes of watering it down even further.
But not all members of the financial industry are against the Volcker rule. In fact, former Citigroup CEO John Reed submitted a letter to the Securities and Exchange Commission saying that the rule does not go far enough in preventing the banks from engaging in risky trading with deposits:
When a firm is focused on market gain, it will employ every available device to achieve those gains — including taking advantages of clients and putting the firm at risk. And. when it is large enough to be a threat to systemic stability, it is able to avoid the constraints of market discipline which apply to smaller actors In short, little will stand in the way of it becoming a threat to systemic stability.
The Volcker Rule is a critical response to this problem. and the proposed rule takes an important step forward in pulling into place the prohibition on proprietary trading and positions in private funds. However, I am concerned it docs not offer bright enough lines or provide strong enough penalties for violation.
Reed called for “specific and vigorous penalties” for traders who break the Volcker rule, as well as a provision requiring banks’ senior officers to sign forms attesting to their firms compliance with the rule.
Reed is no saint when it comes to regulatory matters, as he was instrumental in bringing down the barrier between investment banking and commercial banking in the 1990s, which laid the groundwork for today’s mega-banks and the financial crisis of 2008. However, he has since acknowledged that his position then was a mistake, and has pushed for strong financial reform, including breaking up the biggest banks. (HT: Huffington Post)