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Regulators water down key bank rule

By Claes Bell · Bankrate.com
Thursday, September 22, 2011
Posted: 3 pm ET

It looks like the banks might be getting a break.

One of the more controversial measures in the Dodd-Frank financial reform law is getting a bank-friendly makeover, according to a new article from Scott Patterson and Victoria McGrane at the Wall Street Journal:

Banks could be allowed to continue making risky bets with their own capital, according to a draft version of the so-called Volcker rule that dilutes the provision's original ban on "proprietary trading."

At issue is how regulators and banks define "hedging," or trades designed to offset risk taken by a bank, usually on behalf of customers.

The law originally defined hedging narrowly as trades tied to specific bets.

The new language, contained in a 174-page draft proposal for the rule released to regulators in August and reviewed by The Wall Street Journal, says hedging can cover bank risk on a "portfolio basis," including "the aggregate risk of one or more trading desks." In effect, that opens the door for banks to make all manner of bets on the market, observers said, because a bank might define the risk to its portfolio broadly, such as the risk of a U.S. recession.

Basically, regulators are introducing a loophole here you could drive a Mack truck through. It would be as if you made a law against stealing, with an exception for if it's something you really need. A lot of people would probably obey the spirit of the law, but eventually, for some people, "something you really need" would expand to the point where they were carjacking Bentleys and robbing Tiffany's at gunpoint and claiming legal protection for their activities.

Aside from the macro concerns about preventing a future financial crisis, massive taxpayer-funded bailout and subsequent deep recession, this move has some serious implications for consumers, as well.

Allowing banks to trade with their own money for their own benefit has proven to seriously undermine their safety and soundness. When bank failures happen, their customers can be impacted on a scale anywhere from merely inconvenienced by having to search for a new bank, to being seriously hurt by losses of uninsured deposits and investments.

It also doesn't set a great precedent for the financial rules affecting consumers that haven't been written yet. Regulatory capture, where regulators come to serve the banks they're overseeing, rather than taxpayers, contributed to the myriad forms of financial abuse perpetrated on consumers during the run up to the financial crisis.

Simply put, banks can make a lot of money on "prop trading," and they want to keep doing it. From their perspective, they've already had their fee income severely curtailed, they're shouldering an increased regulatory burden all around the horn, and they'll be damned if they give up one of their biggest sources of revenue without a fight. But if regulators go ahead and let them, despite the clear intent of the law to prevent them from doing so, it doesn't say a lot for what the efficacy of the rest of Dodd-Frank, particularly those many rules that are still to be written.

What do you think? Should banks be able to bet their money in the markets, or should they stick to taking deposits, managing customers money and making loans?

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3 Comments
Roger Briand
October 27, 2011 at 8:47 pm

Geez, they pay their CEOs tens of millions of dollars in bonuses and they complain about that they'll have to change that, and maybe have to curtail the huge payments.
Well, with all due respect -Boo-Hoo! And how do they make these huge sums of money but to have enough money to influence our legislators into deconstructing any barriers so they can gamble and stick us with the bill. These people should be going to gamblers anonymous and learning to make money the old fashioned way, by earning it! Give us a break!

Roger Briand
October 27, 2011 at 8:46 pm

Geez, they pay their CEOs tens of millions of dollars in bonuses and they complain about that they'll have to change that, and maybe have to curtail the huge payments.
Well with all due respect -Boo-Hoo. And how do they make these huge sums of money but to have enough money to influence our legislators into deconstructing any barriers so they can gamble and stick us with the bill. These people should be going to gamblers anonymous and learning to make money the old fashioned way, bu earning it!

DyAnn
September 22, 2011 at 6:27 pm

Drastic times call for drastic measures. Americans are being forced to give up the old American dream because of actions taken, in part, by banking institutions. To allow those same institutions to continue with the same or similar business schemes is extremely unwise. Repeating the same actions over and over expecting different results is defined as insanity.