Bank of Japan warns against the Volcker Rule

Kiyohiko Nishimura

A top Bank of Japan official advised against the Volcker Rule at an Institute of International Bankers conference in Washington on Monday, warning that the mandate could affect the liquidity of foreign debt markets.

Kiyohiko Nishimura, the deputy governor of the Bank of Japan, warned U.S. regulators that unless the Volcker Rule exempts trading in foreign debt, the liquidity of those markets could be affected, Reuters reports.

Nishimura added that he “fully agreed with the reasoning” of the Volcker Rule, but said that, under pressure to re-craft the rule, regulators may not consider all possible outcomes.

“Most of the new regulatory frameworks are not being introduced in normal times, but in a stressed time,” Nishimura said, according to Reuters. “The best prevention may not be the best response to a crisis.”

U.S. regulators have struggled to streamline the Volcker Rule to avoid unintended consequences under pressure from foreign and domestic financial institutions. The Volcker Rule, a provision of the 2010 Dodd-Frank Act, prohibits banks from engaging in proprietary trading.

The rule has come under fire from several other foreign banks, including banks in Canada, Mexico and the United Kingdom. The Volcker Rule exempts trade in U.S. currency but not trade in foreign debt and securities. Regulators can only extend an exemption to foreign debt if it is determined that doing so protects the soundness of the U.S. economy and financial institutions.

Mary Miller, the U.S. Treasury assistant secretary for financial markets, was asked at the conference if the regulators have the authority to extend exemptions to foreign debt markets. She said that the law gives regulators needed flexibility should they decide to extend the exemption, Reuters reports.

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