Tuesday, September 03, 2019

Public interest group contends Volcker Rule changes will endanger financial markets

By Brad Rosen, J.D.

Better Markets, a non-profit organization that promotes the public interest in the financial markets, has issued a fact sheet on the new Volcker Rule in an effort to correct what is seen as misimpressions and misstatements that the new rule has changed little if anything. "It is simply incorrect that the recent changes are ‘tweaks,’ ‘nips,’ ‘symbolic,’ or otherwise insubstantial. It is also incorrect that these changes merely ‘clarify,’ ‘simplify,’ or ‘streamline’ the prior rule," stated Dennis M. Kelleher, Better Markets’ President and Chief Executive Officer.

Kelleher added, "The new Volcker Rule changes are substantial, material, and consequential. They will enable and almost certainly result in significantly increased speculative trading by Wall Street’s biggest taxpayer-backed banks."

Fact Sheet details dangerous loopholes created by the new Volcker Rule. The Better Markets Fact Sheet details three specific loopholes created by the new Volcker Rule. According to the organization, these will enable Wall Street to again engage in socially useless and dangerous financial activities that do not support the productive economy or provide credit to create businesses, jobs, and economic growth. Better Markets further contends these changes are short-sighted and will once again privatize gains while socializing losses while encouraging the very high-risk behavior that ignited the 2008 crash. The loopholes identified by Better Markets include:

The "Scope Loophole." The new Volcker Rule substantially narrows the scope of financial instruments covered by the Volcker Rule. Specifically, the new rule does not include proposed definitional changes to the term "Trading Account" that would better ensure that Wall Street’s banks are prohibited from engaging in statutorily covered proprietary trading positions. Additionally, the new Volcker Rule changes the Trading Account definition so as to create a new presumption that financial instruments held more than 60 days are not speculative trades in violation of the Volcker Rule. Lastly, the new rule also effectively deletes the short-term trading intent prong of the Trading Account definition for banks subject to the market risk capital regulations.

The "Presumption Loophole." The new Volcker Rule also establishes a so-called "presumption of compliance" for certain market-making and underwriting activities. According to Better Markets, those "presumptions" are a truly radical departure from longstanding supervisory practices and represent a return to the same failed industry self-policing policies and philosophies that prevailed before the 2008 financial crisis. The presumptions will now permit Wall Street’s largest banks to avoid or evade prop trading limits, because they permit, in effect, all trading activities conducted within risk limits established by the banks themselves. Accordingly, banks will set their own limits and then determine that they are in compliance with their own limits, which they are allowed to increase without reporting that change to bank supervisors.

The "Hedging Loophole." The new Volcker Rule will permit hedging that does not actually accomplish a hedged position. Under the new rule a hedge is whatever the bank says it is (which the new Volcker Rule will not then apply to). The new Volcker Rule, like the 2018 proposal, appears to eliminate the requirement that hedging activities demonstrably hedge anything. Specifically, under the new Volcker Rule, banks will not need correlation analyses or any other specific analyses to show that hedging activities demonstrably reduce or significantly mitigate any actual risk. Banks merely need internal processes and procedures supposedly designed to reduce risks, even if they do not do so in reality.

Final thoughts. The Fact Sheet concludes that there is no genuine dispute that the new Volcker Rule will enable substantially more speculative proprietary trading. In final analysis, Better Markets observes that while the new Volcker Rule is a tremendous victory for Wall Street, it irresponsibly permits taxpayer-backed banks to engage in more socially useless and dangerous financial activities that do not support the productive economy or provide credit to create businesses, jobs and economic growth. In the organization’s view, "These changes are short-sighted and once again privatize gains while socializing losses whereby the American people will again be forced to pay the bill for bailing out Wall Street’s reckless activities."

A word about Better Markets. Better Markets bills itself as a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make the financial system work for all Americans again. Better Markets works seeks to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, and retirements.