D’Arista responds that, in fact, commercial banks were engaged in proprietary trading, through off balance sheet and special purpose vehicles. She would further address the deep-seated problems of inflation in the system, exposure and counterparty interconnections. Specific leverage ratios must be imposed across the board. After all, it is almost impossible to do proprietary trading on one’s own capital and without leverage.
It is too early to predict what reconfigurations might occur among today’s commercial banks. Speculation swirled on which organisations would be most affected and how far.
Rough estimates suggest that Goldman Sachs derives about 7% of its annual revenue from proprietary operations, with Morgan Stanley garnering about 3% and JP Morgan less than 1%.
As soon as President Obama announced the Volcker Rule, a flood of media comments focused on possible solutions for affected firms. Would Goldman Sachs or Morgan Stanley perhaps give back their commercial charters, hastily procured in September 2008 when they urgently needed access to the Fed window for government funding?
D’Arista points out that the Fed will soon be winding down guarantees and mortgage purchasing programmes. If they cannot sell to the Fed anyhow, why bother with commercial licences?
Finally, the Volcker Rule tackles the too-big-to-fail (TBTF) dilemma, exacerbated by last year’s bail-outs. To keep a lid on balance sheet size, Obama wants to broaden caps on banks’ liabilities, thereby expanding balance sheet limits. Since 1994, market share of banks’ insured deposits has been restricted to a 10% ceiling. A new regime would add non-insured deposits and various other assets to that list, but the question remains: which assets?
“Sure, we can do it, but what are we accomplishing?”
It is still vague. “Sure, we can do it, but what are we accomplishing?” Beaumier wonders. “What is the magic size? When you define systemic risk, size is not enough.” Many of the firms that failed or foundered, such as Lehman Brothers, Bear Stearns and AIG, were not commercial banks at all.
A cap on liabilities might have merit, D’Arista argues, if it were calculated in relation to GDP. “We don’t want a system that is individually or in aggregate too large, relative to economic output–as Iceland’s was.” But simply shrinking liabilities does not confront huge overseas subsidiaries and off balance sheet transactions.
Mix is even less enthusiastic about breaking up organisations. The former regulator would rather deal with TBTF problems on a case-by-case basis, with heightened and more integrated oversight. In reality, Wall Street has moved down to Washington DC. With Congress and the president intervening in financial supervision, the process becomes politicised.
Many say that professional regulators need a degree of independence, with express authority and funding. But in any case, the proposals are likely to morph into a different shape after Congress has recast the bills.