Economics Blog

Finance Blogs » Economics » New rule gets tough with banks

New rule gets tough with banks

By Mark Hamrick · Bankrate.com
Monday, December 16, 2013
Posted: 3 pm ET

Federal regulators have now crossed "agreement on the Volcker Rule" off their checklist. Implementing the rule, which aims to keep banks from trading for their own profit, was some of the unfinished work called for by the landmark Dodd-Frank reform act signed into law in 2010.

Among regulators voting for the Volcker Rule was Commissioner Bart Chilton of the Commodities Futures Trading Commission. In a Bankrate interview, Chilton says the change stops some risky behavior that led to the financial crisis. "I called 1999 to 2008 a decade of deregulation that took place. That resulted in a fairly laissez-faire, a relaxed atmosphere on Wall Street and among financial regulators, people that do jobs like I do," says Chilton.

Looking back, he says the crisis could have been even more damaging. He blames "the lax rules, laws and regulations that led to many of these 'Wall Streeters' and their firms being overleveraged and the possibility that the economy could even tank worse than it did." Chilton says, "We were in a recession, but it could have been an outright depression."

Response to 'London Whale'

Critics have pointed to the need to address other more recent issues, such as the $6 billion trading loss at JP Morgan Chase. The loss has been blamed on a trader dubbed "The London Whale." Chilton says the Volcker Rule would "definitely" have prevented the loss.

The rule is extremely complex -- running more than 900 pages. Former Federal Reserve Chairman Paul Volcker, for whom the rule is named, has said he wished it had been more simple. Chilton agrees, saying, "I certainly think this could have been done in a much more streamlined fashion."

Shedding light on an imperfect collaborative process in Washington, Chilton refers to an old joke about a camel. "A camel is a horse that was developed as a result of a committee. Any time you have many regulators, and in this case we had five different financial regulators involved in it, you end up not with a horse but with a camel. In this case with the Volcker Rule, you have a camel with two, three or maybe 1,000 humps."

Further regulation ahead?

Chilton says the rule helps to restore part of the spirit of the Depression-era Glass-Steagall Act. The law, which restricted banks from trading, was repealed in 1999 during the Clinton administration. "What we did in Volcker partially repeals the repeal, if you will. It gets pretty close to that," says Chilton.

Hoping to take re-regulation a step further, senators Elizabeth Warren, D-Mass., and John McCain, R-Ariz., are supporting what they call the 21st century Glass-Steagall Act. They claim it would "make 'Too Big to Fail' institutions smaller and safer, minimizing the likelihood of a government bailout." But Chilton says he doesn't have much hope that a bipartisan spirit will prevail in Washington anytime soon to get legislation like that approved.

What do you think about the new regulations being passed?

Follow me on Twitter: @hamrickisms.

Bankrate Audio

Mark

Hamrick

Washington Bureau Chief, Bankrate.com

Holden

Lewis

Assistant Managing Editor, Bankrate.com

Bart

Chilton

Commissioner, CFTC

Does new rule get tough with banks?

Federal regulators have approved the complex and lengthy Volcker Rule. Does that make economy more crisis-proof?

LISTEN TO AUDIO

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
Add a comment

(Comments may take 5-10 minutes to appear)