Bipartisan group of senators warn of Volcker Rule’s dire risks

Scott Brown

A bipartisan group of senators told the Federal Reserve and other regulators in a letter on Thursday that the proposed Volcker Rule may reduce market liquidity and restrict clients’ bank market-making abilities.

“The proposed rule, as drafted, could adversely affect Main Street businesses by reducing market liquidity and increasing the cost of capital,” the six Republican and Democratic senators said in the letter, according to Bloomberg. “There is evidence that this is already beginning to occur.”

Signed by Senators Scott Brown (R-Mass.), Tom Carper (D-Del.), Chris Coons (D-Del.), Mike Crapo (R-Idaho), Pat Toomey (R-Pa.) and Mark Warner (D-Va.), the letter adds that the rule also hurts investor returns.

“As market-makers reduce or eliminate inventory, liquidity is reduced and trading spreads widen,” the letter said, Bloomberg reports. “This will increase trading costs paid by investors, thereby reducing returns for investors large and small alike.”

The senators also called for revision of the definition for covered funds and warned that the proposed rule will only hurt consumers.

“The proposal, if implemented in its current form, will overly restrain our customer-facing market-making businesses and our risk-mitigating hedging activities to the detriment of our customers,” Colm Kelleher, the co-president of Morgan Stanley’s institutional securities group, and Jim Rosenthal, Morgan Stanley’s CEO, said, according to Bloomberg.

The Volcker Rule, a provision of the 2010 Dodd-Frank Act, is intended to prevent banks from engaging in proprietary trades. Critics of the measure argue that the rule will damage U.S. competitiveness, increase risks to the financial system and raise costs for consumers.

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