Protect Taxpayers by Implementing a Strong Volcker Rule

Jul 23 2012 - 6:08pm

 

Better Markets has led the charge for a strong Volcker Rule against relentless Wall Street lobbying to allow a few big banks keep their ability to place bets for their own accounts - while backed by taxpayer guarantees. On July 24th, Better Markets chief economist Marc Jarsulic will appear at Rep. Maxine Waters' Financial Services Panel Series on the Volcker Rule.

Better Markets has written extensively on the Volcker Rule, and many of our previous efforts can be found here. However an overview of our position is that The Volcker Rule is narrow in application and limited in scope: it only applies to a few banks that are so big that their failure would threaten the entire financial system and the country’s economy – as they did in the financial crisis of 2008.  Thus, the Rule only applies to those banks that the federal government would spend any amount of money to prevent them from failing so that the country would not have to suffer a Second Great Depression. 

As evidenced by the JP Morgan London Whale trading losses, implementation of the Volcker Rule is still badly needed.  Better Markets is generally supportive of agency efforts to write regulations that implement the Rule so far.  However, the proposed regulations need to be strengthened is several important ways.  We believe they ought to:   

·         break the link between proprietary trading and banker bonuses by limiting market making revenue and compensation to the bid-ask spread, or fees and commissions;

·          impose leverage limits on all permitted trading activity to reduce the possibility of destabilizing creditor runs during periods of market stress;

·          carefully restrict hedging activity, also permitted under the statute, to effectively prevent disguised risk taking; and

·          create an effective enforcement mechanism to deter all forms of evasion

The Volcker Rule is a reasonable response to a foreseeable and severe threat.  It will reduce the risk that the government will again be forced to choose between rescuing failing banks and watching the real economy descend into depression.  The implementing regulations should be strengthened and put into effect as soon as possible.