Occupy the SEC: Former Wall Street Workers Defend Volcker Rule Against Banks' Anti-Regulatory Push.
Folks on the blog have talked about the Volcker rule before, but I am at a loss as to how this would affect regular working folks like myself. As you can see from the segment, Occupy protesters feel that a strong Volcker rule would inhibit or prevent financial institutions from engaging in the kind of risky trading behaviours that were instrumental in creating the current financial crisis. But how would this regulation affect foreign financial institutions? Can someone explain this in plain English?
“But how would this regulation affect foreign financial institutions? Can someone explain this in plain English?”
The Volcker rule applies to any bank with US operations, and this includes many European banks, and may extend to their non-US operations. Like FATCA, then, it’s extraterritorial. And to add insult to injury the rule has a carve-out for US govt debt, but not for non-US govt debt.
For the most part, who knows. A simple rule is proposed by Volcker to keep those Mega Banks that are recipients of government bail out from engaging in the risky behavior that got them into trouble in the first place, (actually, as I understand it , it just put some limits on it). This rule is proposed, because no one seems to want to go back to Glass Steagal legislation (rescinded by Clinton) which separated Commercial and Investment banking and kept banks down to manageable sizes, or not too big to fail.
As you know, or should know, that all the Banks that were bailed out are now even BIGGER than they were then!!
Of course, as with all legislation coming out of America, “the Rule” was incorporated in the 1000 or so pages of the Frank Dodd bill, and left to the regulators to work out the details. They then come up with 500 pages of complicated exemptions, carve outs, specialized rules and who-knows-what, that is determined by those banking lobbyist that are allowed a seat at the table to make the regulation fit their needs.
America has never learned the KISS principle.
So, how does it affect you, well Watcher… in simple terms explains it as well as one can do in brief terms for this blog. It is the Non US Government debt issue that has Canada up in arms, but I bet they too will get an exemption for Canadian debt. It might be on page 501. I think I have read somewhere that this has already happened or in the works… but can’t quickly find that reference this morning, so I could be wrong… as I was skimming.
A couple general things I have read recently that might interest you…
These relate to who gets a seat at the table to influence the outcome of Financial reform….
How to Kill the Volcker Rule: Just Add Fat
http://www.propublica.org/thetrade/item/how-to-kill-the-volcker-rule-just-add-fat
and this…
Why Won’t The Federal Reserve Board Talk To Financial Reform Advocates?
http://baselinescenario.com/2012/02/23/why-wont-the-federal-reserve-board-talk-to-financial-reform-advocates/
cheers
Here is an article that contrast the Volcker Rule with the Glass Stegall Act that was its predecessor. Maybe this will help to throw some light on things.
http://economix.blogs.nytimes.com/2010/01/22/glass-steagall-vs-the-volcker-rule/
Extraterritorialy is a big issue in that the US is attempting to impose the role on ANY bank with even the smallest presence in the US. So clearly for example the Big Five Canadian would be effected throughout the operations even in Canada. One thing to remember is the current Canadian government takes a lot of pride in the fact none of the big Canadian banks had to be bailed out. Flaherty suggested in his letter to the US that the rule be worked to only effect the operations of Canadian banks physically in the US. Notably though Occupy SEC specifically rejected Flaherty’s proposal indicating in their mind the US has the right and obligation impose its laws extraterriorially.
Here is an article that talks extensively about the potential conflicts that the Volcker Rule presents to non U.S. banks.
I think that the lesson that the U.S. should have learned long ago is that banking rules need to be made on an international basis as opposed to a national one. If you read the article it appears that the Volcker Rule will really needlessly gum up the financial operations for non-U.S. banks.
A big problem also is that the Volcker Rule puts all of the decision making power in the hands of U.S. regulatory agencies. And although there is a provision for that exempts non U.S. banks from the Volcker Rule the problem is that it is extremely difficult to receive such recognition from the Securities and Exchange Commission because in the end the Fed makes the decision and the grounds for granting such status is not at all clear.
Personally I have to say that I am disappointed with the world financial community because it hasn’t had the gumption to develop alternative capital markets that would avoid the U.S. I am totally baffled by this failure. It isn’t that I don’t realize how big the U.S. market is. However no matter how big the U.S. market is I am convinced that there are enough other financial centers on this planet that could more than make up for the loss of the U.S. markets. Why aren’t other exchanges more actively engaged in soliciting NYSE listed companies? I would gladly trade on the Hong Kong, German, and Brazil markets if my online broker would offer that service.
The power of FACTA lies in the 30% withholding penalty the U.S. is going to impose on U.S. based trades and bonds. Transactions that are based on exchanges in other countries do not incur this penalty, so why doesn’t the world support such an alternative market?
http://www.complinet.com/dodd-frank/news/analysis/article/how-far-does-volcker-reach-the-effect-of-the-proprietary-trading-ban-on-non-us-banks.html
Here is an article from the Globe and Mail that outlines how the bonds of other countries will be adversely affected by the Volcker Rule:
http://www.theglobeandmail.com/report-on-business/us-financial-reforms-pose-risks-to-canada-carney-warns/article2314788/
This link gives a very good outline of the problems with the Volcker Rule:
http://www.icffr.org/getattachment/8d2601d5-6c19-4a34-afa6-ea5c08c6e9d6/ICFR-Submits-Comments-on-Proposed-Volcker-Rule.aspx
@recalcitrantexpat
If you request physical securities certificates from your broker(which they will try to talk you out of but that’s another story) of Canadian companies you invest in there is no way for FATCA to apply as your relationship is now directly with the Canadian non FFI entity like Suncor or Bombardier for example. Everytime they declare a dividend they write out a Canadian check to you personally(just as your Canadian employer would) that you can bring to any Canadian bank/credit union or check cashier without any US involvement. In some countries such as Australia and New Zealand where all securities are held in registered or book entry form most brokers don’t even provide “custody” thus limiting access to only local stocks and up to now don’t even have any involvement with QI/FATCA. Some Canadian brokers are starting to off direct access to European markets I think TD and HSBC for example but the transaction charges tend to be much higher than in the US or Canada.
Thanks for the responses, everyone. Maybe I’m wrong as I don’t have as good a grasp on things related to the stock market as a lot of others here, but re-enacting the Glass-Steagall Act would be a better solution to all of this. At least that law was solid and worked well for a long time until the neo-liberals repealed it.
@zucchero81- I agree. Glass-Steagall was much simpler, it worked and it presented no problems for non U.S. banks. Repealing it was a big mistake and refusal ro readopt it is another mistake.
@zucchero81
To be fair… It was defacto repealed anyway, as it enforcement was not being applied by the regulators at the time. So, it was just putting in law the reality of what was already occurring in the Financial community. And, it was bi-partisan effort. It was a Conservative bill signed by a Liberal President. If you want to read one book to understand some of the many factors impacting the run up to the Financial crisis, I would recommend ‘All the Devils are here’. There are lots of devils, and unfortunately they did not all wear the same partisan or philosophical clothing.