The Volcker rule has encountered some surprising new enemies. U.S. banks have long loathed the regulation, which aims to limit proprietary trading. But as policymakers put the finishing touches on it, Canadian and Japanese authorities have joined the chorus of complaints.
The rule, named after former Federal Reserve Chairman Paul Volcker, has the simple aim of barring banks from trading on their own accounts. In practice, however, there’s a fine line between making markets and placing bets. That will make compliance a tricky, and potentially costly, dance with regulators. Banks may decide some markets are no longer worth the effort.
The amount of lost liquidity is anyone’s guess. But it is worrying foreign countries historically dependent in part on U.S. banks making markets in their sovereign debt. Less liquid markets inevitably mean higher interest rates. Moreover, as currency swaps also fall under Volcker’s shadow, the rule could make dollar funding scarcer.
The complaints are genuine. Before the crisis, it was in the interest of banks to ensure markets were deep and liquid because flow visibility enabled them to place more profitable bets with their own capital. And while banks were the main beneficiaries, it also helped governments, companies and consumers to borrow at what otherwise would have been higher rates.
One sovereign that won’t suffer is the United States, because trading in U.S. Treasuries is exempt under Volcker. Mark Carney, governor of the Bank of Canada, says this creates an unlevel playing field and would like to see the carve-out extended to other government bond markets.
But such exemptions would effectively amount to the United States subsidizing borrowing costs of other nations. After all, U.S. taxpayers could be on the hook if bad bets blow up a big bank.
Carney is no apologist for banks. His tough stance on regulation prompted a recent tirade from JPMorgan boss Jamie Dimon. And it may not be the ideal time to snuff out a subsidy that governments around the world have come to expect. But given the legacy of the financial crisis, it’s difficult to see why the United States, or any country, should continue to provide such gifts.