Ezrati’s Economic Outlook: Volcker Rule Confusion

Vagueness and ambiguity dog Dodd-Frank provision regulating bank securities trading.


Recent Congressional hearings on the Volcker Rule made one thing clear: Of all the many provisions of the Dodd-Frank financial reform legislation, this one, which would forbid banks from trading securities on their own account, remains the most contentious. Though much of the dispute over the rule has revolved around issues of liquidity in securities markets and the international competitiveness of American finance, a more fundamental problem lies in the proposal’s inherent and debilitating ambiguities.

The bankers have argued against the rule on two levels. Without flows of funds from proprietary trading, they have said, markets will lose liquidity. Of late the European Commission has added its weight to the argument, fretting that lost liquidity will deepen Europe’s debt crisis. American bankers have also worried that limitations on American financial institutions will drive the issuers of securities to take their business abroad. The regulators have countered that other, non-bank institutions will expand to fill any gap left by banks. They have argued further that even if market liquidity were to suffer from the rule’s imposition, it would be small price to pay for a reduction in systemic risk. Because the rule also forbids banks’ positioning against customers, they contend that it will curtail predatory behavior. 

About the Author

Milton Ezrati

Milton Ezrati

Milton Ezrati is senior economist and market strategist for Lord Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, linking aging demographics and globalization, will appear next summer from Thomas Dunne Books of St. Martin’s Press. See more of his articles about the economy here.

 

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