The Securities Industry and Financial Markets Association (SIFMA), the American Bankers Association, The Clearing House Association, and The Financial Services Roundtable got together to express their beliefs about the proposed regulations under the Volcker Rule. The proposed regs were jointly written by five agencies to implement the Volcker Rule, the part of the Dodd-Frank bill limiting proprietary trading.
SIFMA’s view is that the proposed regs are too expensive and wrong-headed, and that the agencies should start over, replacing strict rules with “guidance”. They explain:
We believe that Congress’ goal in adopting the statutory Volcker Rule was to focus banking entities on providing liquidity to customers and to prohibit excessive risk taking beyond that required for customer activity. The Proposal, however, defines permitted activities far too narrowly and subjects banking entities to a conceptually difficult and operationally expensive set of requirements, the costs of which cannot be justified based on their benefits. These requirements may paralyze effective market making, which is far from the statute’s intent. In addition, as an unintended and deleterious side effect, the Proposal will severely limit banking entities’ ability to hedge their own risk, thereby increasing rather than decreasing the risk to banking entities and the financial system.
This is the opposite of the comments of Occupy the SEC; it says that proprietary trading was a major cause of the Great Crash, and the point of the Volcker Rule is to make sure that banks don’t crash the economy again in their search for million dollar bonuses.
SIFMA doesn’t explain the basis for its view of the intent of Congress. Maybe they know because of all the money they spent lobbying the bill; backed up by the money they spent lobbying the agencies on the regulation and then talking to the agencies about the proposed regs while comments were in preparation. Of course, banks aren’t allowed to say that, it wouldn’t be polite to put their pet legislators and regulators on the spot.
Dodd-Frank doesn’t have an overarching purpose section, and there isn’t one in the section on the Volcker Rule, but where purposes are given, they relate to crashing the economy. See, e.g. Dodd-Frank § 112.
The word liquidity is used in Dodd-Frank more than 45 times. Not one of those uses is positive. There is great concern that giant institutions have adequate liquidity, and the regulators are encouraged to make rules insuring that they do. See, e.g. § 165(b)(1)(A)(ii). Here’s an example of a negative use of the term. Dodd-Frank requires the creation of an Orderly Liquidation Fund, paid by assessments on certain large financial institutions. The assessments are to be set by a sliding scale based on the riskiness of the institution. One factor to be considered is the risk that the institution is subject to sudden calls on its liquidity in times of economic distress. Another factor is the importance of the institution as a source of liquidity. Both cases show that Congress thought that the important issue is the stability of the financial system. Liquidity is mostly a problem to be controlled for the sake of financial stability.
In short, there is nothing in Dodd-Frank to support SIFMA’s basic criticism.
SIFMA’s second argument is that the agencies should have conducted a gigantic cost-benefit analysis. Congress already did that, by passing a statute requiring an end to most forms of proprietary trading. The proposed regs actually allow some proprietary trading that could have been prohibited, and creates several giant loopholes, as Occupy the SEC pointed out. But that wasn’t enough for the piggy banks. They say that the agencies should overrule Congress and shouldn’t really try to prohibit all proprietary trading:
We believe the marginal benefit of trying to screen every permitted activity in search of possible prohibited proprietary trading in this way is minimal and is far outweighed by the cost.
Actually, as Occupy the SEC says, simple prohibitions on proprietary trading are the way to enforce the Volcker Rule, backed up by stiff penalties based on strict liability. There is no reason to think that JPMorgan under its whiny CEO, Jamie Dimon, provides any more benefit to securities traders in the way of liquidity than any other market participant. Those other participants don’t use checking and savings deposits insured by the FDIC. And no one is guaranteeing those other participants against failure with taxpayer money.