Federal Reserve Governor Sarah Bloom Raskin said during a recent speech to graduate students in Colorado that regulators should consider eliminating or withholding exemptions to the controversial Volcker Rule.
The rule, which has yet to be finalized, prohibits banks from engaging in proprietary trading — or risky investments with client funds. The measure does allow for risk-hedging and market-making activities by hedge funds, conventional banks and other industry participants. Opponents of the measure say that the rule would undermine U.S. competitiveness and damage market liquidity, ThinkProgress.org reports.
Raskin said, however, that the benefits associated with exemptions to the rule will be limited, as community banks that follow the traditional banking model are the institutions that provide “true liquidity.”
“Indeed, proprietary trading involves buying and selling purely for speculative purposes that have little to do with a true assessment of a financial position’s underlying value,” Raskin said, according to ThinkProgress.org. “Price discovery actually is impeded by this hyper-liquidity that is introduced by such speculation. This hyper-liquidity, motivated by nothing more than expectations of short-term price movements, creates inefficient subsidies to buyers and sellers with no compelling public benefit…In other words, certain capital market activities for federally insured banks should not be supported by vast amounts of public and private expenditure.”
Big banks won exemptions in the final draft of the rule that allow them to participate in risk-hedging activities. Raskin told the students that she had dissented from the Fed’s approval of the final Volcker Rule proposal because she felt that it could undermine the rule.
“I was concerned that, as proposed, the guard rails were too broad and would allow banks to be able to go too far off the road,” Raskin said, ThinkProgress.org reports. “Further, I was concerned that the guard rails as crafted could be subject to significant abuse—abuse that would be very hard for even the best supervisors to catch…I feel it is very important that the guard rails be strong and be set very close to the road because of the potentially severe dangers of, and costs associated with, proprietary trading by institutions that have access to the federal safety net.”