Volcker rule scrutinizes proprietary trading businesses
Five government agencies including the US Federal Reserve and the Federal Deposit Insurance Corp are set to ink their signatures on the proprietary trading ban, otherwise known as the Volcker Rule. Named after former Fed chairman Paul Volcker known to have tamed rampant inflation in the 70s and was once a chief adviser to President Barack Obama. Volcker proposed the ban in the hopes of restoring financial stability in the market in the aftermath of the 2008 financial crisis. Volcker argued that risky bets made by banks using federal deposit insurance and discount borrowing had caused such crisis on the market, and that a ban of such activity will reduce the probability of more taxpayer-funded government bailouts, a Bloomberg report read.
Last week, Treasury Secretary Jacob Lew said, "It prohibits risky proprietary trading while protecting economically essential activities like market-making. Regulators have worked hard to find the right balance that protects our economy and taxpayers while also leaving room for well-functioning financial markets."
Wall Street banks JPMorgan Chase & Co., Goldman Sachs Group Inc and their allies had been campaigning for the past three years in protest of the ban. Bloomberg said in its report that majority of them already resorted to closing its proprietary trading desks to prepare themselves for the rule to become effective. Moreover, as they await for the final deliberations of the five government agencies to approve the Volcker rule, the Wall Street banks will be awaiting for the parameters regarding how they will buy and sell financial products for their clients while managing their own risks.
The five largest firms on Wall Street stands to lose part or whole of a collective USD44 billion in revenues as the government agencies define what market-making is and its exemptions, based on Bloomberg data for the year ended September 30.
Securities Industry and Financial Markets Association president Kenneth Bentsen said in a December 5 statement, "An overly restrictive Volcker rule would curtail market liquidity, harm investors and dampen economic growth." The lobby group is the biggest one on Wall Street.