Saturday, May 04, 2013

Quoting Chairman Volcker, Sen. Wirth Was Prescient in Senate Report on Proxmire Financial Modernization Act

The Proxmire Financial Modernization Act of 1988, which passed the Senate but was never enacted, came to fruition with the passage of the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act. The Proxmire bill would have repealed Glass-Stegall and allowed a bank holding company to operate a securities affiliate under Fed and SEC regulation. Just as with Gramm-Leach-Bliley, the Proxmire bill embodied the now largely discredited principle of functional regulation.

In Senate Banking Committee Report No. 100-305, accompanying the Proxmire bill, Senator Tim Wirth (D-CO) noted that there are good reasons to support a cautious approach to new securities activities for bank holding companies. Senator Wirth noted that former Fed Chair Paul Volcker expressed reservations that a bank can ever e truly shielded from its securities affiliates.

This Volcker position in 1988, as reported by Senator Wirth, is not too far from Chairman Volcker’s current skepticism of the U.K. Vickers Commission proposal to allow commercial and investment banking activities within the same holding company, with the investment bank permitted to conduct proprietary securities trading.

In recent testimony before the U.K. Parliamentary Commission on Banking Standards, Chairman Volcker said that the ring-fencing of retail from commercial banking within the same bank holding company would inevitably break down. Mr. Volcker called for institutional separation of retail banking and proprietary trading and sponsoring hedge funds.

When the U.K. Government drafted legislation to implement the Vickers Commission recommendation to ring fence retail banks from investment banks engaged in proprietary trading and sponsoring hedge funds, Parliament took the unprecedented step of creating its own inquiry into banking standards and taking evidence on the draft legislation. The Commission on Banking Standards has heard testimony from eminent authorities, including Chairman Paul Volcker and Martin Wheatley, head of the new Financial Conduct Authority. Recently, the Commission decided to take further evidence in 2013 on whether the full separation of proprietary trading, something akin to a Volcker Rule for the UK, may be appropriate.