(Bloomberg News) Lobbyists for U.S. banks say a proposed ban on proprietary trading will cost companies and investors more than $350 billion. Some economists and fund managers say the claim is greatly exaggerated.
The impact of the so-called Volcker rule on markets and the economy is being debated at a congressional hearing today, a month before the Feb. 13 deadline for comments on a 298-page plan by regulators to implement the ban. The proposal, championed by former Federal Reserve Chairman Paul Volcker, 84, would constrain the largest banks from betting on investments that could produce big losses.
Lobbying groups, including the Securities Industry and Financial Markets Association, say the narrow definition of what's allowed under the proposal will curtail the role of banks as market-makers, preventing them from purchasing securities clients want to sell without first finding a buyer. That would reduce liquidity and increase transaction costs for companies, according to an industry-funded study.
"Their fears are greatly exaggerated," said Simon Johnson, an economics professor at the Massachusetts Institute of Technology scheduled to testify at the House Financial Services Committee hearing. "The industry's claim ignores the fact that when the largest banks stop doing this kind of trading, somebody else will step in to do it. And we have to weigh those costs against the risk of banks blowing up."
Lobbying Priority
The potential loss of revenue for banks has made pushing back against the Volcker rule a lobbying priority. Efforts by Sifma and other groups to modify the proposal come as lenders already are making less money buying and selling securities. Trading revenue at JPMorgan Chase & Co., the largest U.S. lender by assets, dropped 18 percent in the fourth quarter, the bank reported last week. Citigroup Inc., the third-largest, posted a 10 percent decline yesterday.
The Volcker rule is scheduled to take effect in July, two years after passage of the Dodd-Frank Act, which incorporated the restrictions. While a final version of the regulation could be published within two to three months of the Feb. 13 deadline, there's a chance details won't be ironed out before the July deadline, regulators say.
Two studies of the Volcker rule's impact on markets, commissioned by Sifma, conducted by consulting firm Oliver Wyman and published last month, don't mention potential benefits. One report estimated that because investors won't be able to sell bonds as easily as before, they will lose as much as $315 billion on the value of existing holdings. Borrowing costs for companies selling new debt would rise by $43 billion a year because buyers of debt would demand higher premiums for less- liquid assets, according to the study.
'Faulty Assumptions'
The Oliver Wyman report bases its analysis on an academic study that looked at the loss of liquidity during the financial crisis. That exaggerates the impact of the Volcker rule by assuming it would be as disruptive as the worst recession since World War II, said Senator Jeff Merkley, an Oregon Democrat involved in drafting the original law.