American Enterprise Institute’s Wallison says Volcker Rule simplification not the solution

Peter Wallison

Peter Wallison, a senior fellow at the American Enterprise Institute, recently criticized the Volcker Rule, saying that simplifying the rule will not address the issue of banks as market-makers.

The Volcker Rule, a provision of Dodd-Frank, prohibits banks from engaging in proprietary trading — or risky investments with client funds. U.S. politicians, regulators and members of the financial industry have made repeated calls to Congress to simplify the Volcker Rule.

Wallison said that in simplifying the Volcker Rule, “regulators are grapping with an impossible problem — how to prohibit bond trading while preserving bank activities that are vital to the health of capital markets,” according to the Wall Street Journal.

Wallison said that banks act as market-makers for securities in selling and buying bonds at market prices. If banks did not serve this capacity, Wallison said, financial firms would be unable to make changes to their holdings profile or liquidate assets when extra cash is needed.

Without bank involvement in market-making activities, Wallison said, the prices for fixed-income securities would be much higher for both buyers and sellers, as “the spreads between bids and asks would be much wider,” the Wall Street Journal reports.

“To forbid proprietary trading while still permitting banks to act as market-makers and trade for customers requires a sufficiently bright line to assure banks that they will not be violating the law then they carry on a permissible trading business,” Wallison said, according to the Wall Street Journal.

Banks have been taking more steps to assure compliance, with some institutions adding entire compliance departments to their operations. Should banks feel that their compliance with federal regulations is not assured, these institutions may no longer engage as market-making traders.

Though the Volcker Rule was intended to provide transparency to what some have referred to as a murky area of the financial industry, as well as provide greater assurance that there will not be a repeat of the 2008 financial crisis, Wallison said that simplification of the rule will not address the larger issue at hand.

“The fundamental question is whether we want banks to act as market intermediaries or not,” Wallison said, the Wall Street Journal reports. “If a case can be made that this is somehow dangerous or will lead to another financial crisis, then let’s have someone make it. If the case can’t be made—and it hasn’t yet been made—then the Volcker Rule should be repealed.”

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