On the Volcker Rule – Last Word (for now)
With tonight’s deadline for comments on the Dodd-Frank Volcker Rule – and especially the submission of comments by the originator of the eponymous regulation – I thought I might get in my final thoughts. Of course, they are hardly final inasmuch as this debate will be with us for a good long while.
To my way of thinking, those in commercial banking are mostly honestly trying to find ways of making a buck (whether they are doing it doing it for their own remuneration or for shareholders is immaterial) as they should, and have historically been well “incented” to.
But in granting banks charters, liquidity access and deposit insurance, there are risks that are acceptable – and there are those that are not. Another way of saying this is that if the taxpayer wants to take more risk, I suppose we can charge institutions enough for our support to balance risk/reward – but that would not seem to be the purpose of government backstopping of banks.
The “competition from foreign banks” argument is a red herring in my opinion. There is currently (and will be for a very long time) so much global liquidity that the argument we need more liquid markets to shave cost is a non-starter in real macro terms. In a supply glut of global labor, productive capacity and capital, the argument simply doesn’t wash.
Let the foreign competition go broke on risk if they wish. Yes, occasionally a foreign bank may make interim profits because it is less regulated than a U.S. institution – but (a) investment stupidity always leads to the same place and (b) I think it is axiomatic that the profitability of banking institutions should be outside the concern of their prudential regulators – at least after one passes the point of attracting sufficient risk capital to the industry so as to enable it to perform its basic capital formation function.
Short and sweet – unusual for yours truly. But there is not much more to say
One Response to “On the Volcker Rule – Last Word (for now)”
There is the "risk" of backing entrepreneurial investment and there is the "risk" of playing casino games with markets across the world. The net value of the latter is nil, or maybe negative, if you consider the time and talent that goes to waste doing it. Rather than trying to regulate it, which is in most instances fighting the last war, it would be better to just tax it via the Tobin Tax, discouraging excess activity and garnering some revenue to pay for the wheels when they break.