Wednesday, February 25, 2015

Volcker Rule

FLG has long argued that the Volcker Rule sounds good in theory, don't let the banks take on risk subsidized by the tax payer by limiting their ability to trade on their own accounts, but that it would be difficult if not impossible to actually implement such a rule because in any particular trade it is near impossible to be certain whether the bank is taking on or laying off risk.  For example, let's say a bank engages in an interest rate swap to transform some of their fixed rate assets into variable rate assets.  Does that mean they are taking on risk?   They are going from certain cash flow to uncertain cash flow, so you could say, yes, more risk.  What if the bank had 90% fixed rate assets and the bank was concerned interest rates were going to rise?    Then the swap seems like a prudent move to hedge risk.  Anyway, after years, the regulators are actually trying to implement it.

From the FT:
Five years later it is crunch time. The regulators have to start implementing the rule. But it might not be enforceable.

Matt Levine at Bloomberg put together this handy chart that illustrates the silliness:
That chart is nonsense, which is partly my fault -- don't go trade on it or anything -- but mostly the fault of the Volcker Rule.

The whole endeavor was silly from the beginning.   FLG was always in favor of increasing capital requirements and decreasing leverage, but leaving the what they were levering up on and what risks they were taking to the banks.    FLG is even okay with putting a cap on bank size.  Heck, he's even in favor of limiting interstate banking as a way to contain banks.  (Although, he is still extremely skeptical about attempts to reimpose Glass-Steagall.)    Dodd-Frank is such a mess.

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