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Geithner Says No Meaningful Liquidity Risk in Volcker Rule

Treasury Secretary Timothy F. Geithner
Treasury Secretary Timothy F. Geithner. Photographer: Jay Mallin/Bloomberg

Treasury Secretary Timothy F. Geithner said he doesn’t think the Volcker rule ban on proprietary trading will present a “meaningful risk” to liquidity or credit availability in European countries.

“I don’t believe, that despite the concerns expressed by governments and central banks, the rule as drafted presents a meaningful risk to liquidity or credit in those countries,” Geithner told the House Financial Services Committee today. He said he’s confident U.S. regulators will find the “right balance” in implementing the rule.

The Volcker rule, named for its original champion, former Federal Reserve Chairman Paul Volcker, is intended to reduce the chance that banks will make risky investments with their own capital that put depositors’ money at risk. The regulation is one of the most contentious provisions of the 2010 Dodd-Frank Act.

Officials from Canada, Japan, the U.K. and the European Banking Federation have said in letters to U.S. regulators that the measure would harm global liquidity and international cooperation.

Banks “shouldn’t be able to run internal hedge funds that take a huge amount of risk relative to capital because that could put us in a situation where their failures cause too much damage to the innocent,” Geithner said. The rule also provides, “appropriately so, some exemptions for market-making and for hedging, things that they need to do.”

The restrictions on banks’ trading activities are scheduled to take effect July 21. Federal Reserve Chairman Ben Bernanke said Feb. 29 that regulators probably won’t have the rule ready in time.

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