At the pace of a brisk glacier, the US Volcker rule is taking shape. This week the US Financial Stability Oversight Council released its recommendations on how to create the rules that ban banks from proprietary trading, and from investing in private equity and hedge funds. It wants them to be “consistent”, yet “account for differences”, and “dynamic” yet “predictable”. A mere 81 pages of these suggestions later, the final laws promise to be a maze of regulation. But while few investors will shed a tear for any banker who complains about being policed into oblivion, they should ask whether these rules will indeed succeed in reducing systemic risk.
The FSOC’s recommendations include a plethora of internal controls and reviews that themselves require reviews. Chief executives must also sign off on the entire compliance system. This smacks of another piece of dubious post-crisis legislation: the Sarbanes-Oxley Act. The 2002 rules, brought in after accounting scandals at Enron and WorldCom, mandated an onerous compliance burden. But while audit partners love the chargeable hours, privately they doubt the rules add much of a safety buffer. Lehman Brothers still managed to use accounting gimmicks to hide the true state of its finances.
There will be much argument in the coming months over the wording of the Volcker rule, particularly where and how to draw the line between banned proprietary trading and allowable market making and hedging. Regulators are already finding this to be harder than they thought and even though some banks have begun to carve out their trading divisions in anticipation of the rules, the deeper problem of the Volcker rule remains. It attacks businesses that actually weathered the crisis relatively well without addressing the bits that almost destroyed the industry.
The FSOC’s recommendations include a plethora of internal controls and reviews that themselves require reviews. Chief executives must also sign off on the entire compliance system. This smacks of another piece of dubious post-crisis legislation: the Sarbanes-Oxley Act. The 2002 rules, brought in after accounting scandals at Enron and WorldCom, mandated an onerous compliance burden. But while audit partners love the chargeable hours, privately they doubt the rules add much of a safety buffer. Lehman Brothers still managed to use accounting gimmicks to hide the true state of its finances.
There will be much argument in the coming months over the wording of the Volcker rule, particularly where and how to draw the line between banned proprietary trading and allowable market making and hedging. Regulators are already finding this to be harder than they thought and even though some banks have begun to carve out their trading divisions in anticipation of the rules, the deeper problem of the Volcker rule remains. It attacks businesses that actually weathered the crisis relatively well without addressing the bits that almost destroyed the industry.
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