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Volcker to industry: 'Quit stonewalling' on trading ban

by Ira Teinowitz in Washington | Published February 14, 2012 at 9:13 AM

Former Federal Reserve Chairman Paul Volcker is calling on big banks to end their "futile stonewalling" against the Dodd-Frank Act rule that bears his name. Instead, he said, they should be providing "active cooperation" to regulators as they try to fulfill Congress' order to ban banks from proprietary trading for their own accounts.

In comments filed with federal financial regulators on Monday, Volcker rejected opponents' four biggest objections to the Volcker Rule -- that proprietary trading isn't a significant risk, that a ban would imperil market liquidity, that the competitive position of U.S. banks operating overseas will be adversely affected and, finally, that the proposed regulation is too complicated and costly to implement.

"My short answer to each of these objections is 'not so,'" said Volcker. His letter was joined by scores of comments on the regulators' proposed wording filed by industry groups, banks and others.

He conceded that implementing the ban will more be complicated than he would like and urged regulators to make sure the rule is as unintrusive as possible.

Despite that reservation, Volcker said, "I cannot help but be impressed by the success the regulatory agencies [achieved] so far in reaching agreement on the preliminary rule and by your confidence that the regulation can and will be implemented successfully," said Volcker.

Congress' decision to include the rule was an attempt to implement Volcker's long-held concerns about conflicts implicit in banks trading for their own accounts at the same time they handled customer accounts. Volcker had said after regulators released the initial proposal to issue the ban that he would have liked to see a simpler proposal.

Monday was the deadline of the Securities and Exchange Commission, the Federal Reserve, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. for comment on the rules.

Volcker on Monday suggested regulators are doing their job in trying to ease the transition to the rules while banks aren't doing enough to help them.

He called simplicity and clarity in rulemaking "challenging objectives, which for full success, require constructive participation by the banking industry."

Volcker said banks need to realize that they have lost the fight and it's now the government's position that explicit and implicit support of commercial banking can be justified only to the extent the institutions provide essential financial services and that proprietary trading doesn't justify taxpayers subsidies implicit in access for Federal Reserve credit and deposit insurance.

Volcker rejected all the warnings of opponents.

He said while it's true wasn't the only cause of the Wall Street meltdown, it is intrinsically risky.

"To be sure there were many factors other than proprietary trading that contributing to the breakdown of the financial markets. However, losses within trading positions were in fact a contributing factor."

He said market liquidity isn't likely to suffer from the rule except where it should because of excessive risk.

"Proprietary trading activity, hedge funds and equity holdings should stand on their own feet in the marketplace, not protected by access to bank capital," he said.

He said efficiencies built into the U.S. banking system make it unlikely that U.S. banks will find themselves much disadvantaged by restrictions in the Volcker Rule.

Finally he said worries about the complications of the rule are overstated, based on a first draft that will get significantly narrowed before final drafting. He said the ultimate rule would impact a very few big banks.

"With active cooperation among the agencies and with constructive consultation instead of futile stonewalling, an important reform can soon be put in place," he said.

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Volcker to industry: 'Quit stonewalling' on trading ban

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