The Banking and Strategy Initiative

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Meet the Volckers’ Marathon Pt. II | Banking Insight

The Volcker Rule and the corresponding additions to the law made by each of the FDIC, SEC, Fed and CFTC in line with the same since October are proposed to become law in July 2012  restricting all sorts of proprietary trading  including unwarranted repo transactions as they become part of it by letter of the law; marketmaking trades thus obviating the proprietary trade transaction and probably international derivatives transactions as well; and investments in hedge funds and equity by banking institutions. The banking institutions being defined as those eligible for continuing explicit and implicit support by the Federal Government of commercial banking organisations including routine access to Federal Reserve Credit, deposit insurance or emergecy support i.e.. all forms of taxpayer subsidy granted to them for maintaining essential services , including a safe and efficient payments mechanism, a safe depository for liquid assets nd the provision of credit to government, business and individuals.

The above definition may paraphrase Paul Volcker’s words but is essentially eevrything he uses as definition to preface the subject and is comprehensive in terms and indicative of his full understanding of how the banking system is to be isolated from other forms of trading and services adopted by banks and ringfence the inmpact of taxpayer money in future situations.

All laws added by the regulators have only been considered since October 2011 and the comment periodon Volcker Rule’s incorporation into the dodd Frank act ended with a vehemant overpowering use of words by bank CEOs, the rule maker and senators trying to take charge and get the law passed in its most stringent forms for currency and impact.

Paul Volcker’s own comments of course argue somehow that the markets will not become illiquid without proprietary trading or the omnipresent repo transaction, i.e. all bond transactions entail exchanging of bonds whenever one watnts to sell or buy bonds with another entity. He also variously defends the questions of cost and competitiveness that will necessarily arise and neglects answering senators who have apparently asked for not such a “tepid” regulation

His rebuttal does pander to the general “OWS” feeling or emotion that banks are fleecing them for defence for banning prop trading, the one that takes out of the equation, more than 40% of banks’ potential earnings as it cannot be allowed to risk losses to the function of the bank as essential services and of course despite the asset bubble and the leverage; the accounting practices and the lack of regulatory oversight were also in each case of failure exacerbated by a government of and for favors that essentially continue. Banks can easily run trading desks without that capital coming from capital allocated directly to that business but the Paul Volcker rule is welcome honestly only because no one believes the banks will do that and the only way to save taxpayers’ money is to cut that out of the bank itself.

We having thus understood his point of view, it is imperative that no one neglects to believe that despite any law makers’ potestations and refusal to give in to persistent lobbying, there will be more than average costs involved and that the industry has already readied itself for the inevitable is but obvious, but that it will be costly for the economy, the monitoring of 20 toll gates and disqualification of certain market making trades, and the entire subsuming of international trade to be disqualified by eliminating sovereign bonds, drerivatives and others force global institutions to choose between the US and abroad, the BofA having perforce already chosen the US instead.

Again on liquidity, one agrees with Volcker’s intentions and thrust fof argument that each repo creates mountains of liquidity that is misused and perhaps Basel III already goes a long way in enforcing the Tier I common restrictions and the overall leverage restrictions and/or limitations  of counting short term inter bank repos as Capital. Whether additionally any impact of reviewing proprietary trades vs market making trades is definitely cause for an innate confusion and thus regulatory arbitrage between and at oversight meetings that is so typical of the US regulatory framework

Again confusion stems from the fact that the regulation just wants to institutionalise bank failrures as a government obligation, a fact we had almost come to negate by letting Lehman a bankruptcy, and while we started the rounds by understanding “too big to fail” as a malaise we have had to understand it as the basic charter of government and thus the regulation’s impact will redefine the banks as ESMA services and retail lenders and trading units independent of each other. The problem that the second tier of refinancing causes and the repo transaction  is still not clear. and hence the marathon of comments on the last day derailing any calendar for this regulation without diluting the terms and blanketing the entire banking trade as a business.

At this point, again I do belieeve the banks have more than cooperated and understood what is required of them and now we must see how we might land in a soup with a law that is difficult to regulate..”makes no sense” as the idling SEC employee might say while surfing the world wide “Ron paul” web

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