Sir, In your editorial “Drop the Volcker rule and keep what works” (February 13) you argue that the Volcker rule which prohibits banks’ proprietary trading should be removed since it is a costly form of regulation of a type of trading that did not cause the financial crisis. But what if this type of trading has caused something else?
As a facilitator to the real economy, the financial sector reallocates money, credit and risk among its participants so that they can produce useful goods and services to society in the most efficient way. It is hard to see what role proprietary trading should play in this process.
In the run-up to the financial crisis in 2008 one observed a stronger growth of the financial sector relative to the real economy. In fact the sector’s share of gross domestic product in the US rose from 6 per cent in 2000 to 9 per cent in 2010. In 2015 this number is back to 7 per cent, probably a more normal level. Proprietary trading did not cause the financial crisis — too many other issues were at play — but it definitely played a part in the “oversizing” and excessive risk-taking of the financial sector and as such contributed to its tilting.
It was actually the source of something else that has haunted the sector and obstructed its rebuilding of credibility in the aftermath of the crisis — misbehaviour. Since 2010 the largest investment banks in the US have paid well above $150bn in fines and settlements related to misdeeds during the years 2005-13. A significant share of those fines were related to proprietary trading making wrong twists. To mention a few: Libor fixing, forex and commodity market manipulation, betting against own clients and more.
Compared with 2010, those banks have today considerably lower trading revenues (-40 per cent). This does not seem to have hurt the real economy. On the contrary, the economy does more with less. What has changed is behaviour and probably financial risk appetite. Both fines and Volcker might have played a role here. Dropping the Volcker rule could become an invitation to a new party with a new hangover.
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