January 3, 2012

Originations: We Need A New Volcker Rule For Banks

January 3, 2012

Originations: We Need A New Volcker Rule For Banks

This installment of my Originations linkfest is dedicated to the Volcker Rule, a proposed set regulations (named after former Fed chairman Paul Volcker) that limit banks with federally insured deposits from trading for their own benefit.

Normally I just link, but today I’m leading with an excerpt from former FDIC head Sheila Bair’s recent Fortune article on the topic. The current Volcker Rule proposal is 300 pages, and she simplifies it down to this:

Regulators should scrap the mind-boggling complexity in the proposed rule and focus instead on the underlying economics of a transaction. If the transaction makes money the old-fashioned way — the customer paying the institution for a service through interest, fees, and commissions — then it passes the test. If profitability (or loss) is driven by the direction of markets, then it fails. Inevitable gray areas, such as marketmaking, need to be done outside of the insured bank and be supported by a truckload of capital. Securities firms should be allowed to maintain adequate inventory to make liquid markets.

Most important, regulators should tell executives and boards that they will be held personally accountable for monitoring and compliance. Bank leadership must make clear to employees that they are supposed to make money by offering good customer service, not by speculating with the firm’s funds.

Complex rules are easy to game and hard to enforce. If regulators can’t make this work, then maybe we should return to Glass-Steagall in all of its 32-page simplicity.

And now the must-read Volcker Rule links…

-We Need A New Volcker Rule For Banks (Sheila Bair, Fortune)

-Where Is The Volcker Rule? (Baseline Scenario)

-The 2012 Market & Regulatory Landscape (WSJ)

-Volcker Rule Definition (New York Times)