Volcker Rule Should Prevent Glass-Steagall Return, Chilton Says

Bart Chilton
Bart Chilton, a commissioner on the U.S. Commodity Futures Trading Commission. Photographer: Brendan Hoffman/Bloomberg

Bart Chilton, a member of the U.S. Commodity Futures Trading Commission, said new rules restricting banks from taking risks with their own money should be strong enough to prevent a return to the Glass-Steagall law.

The so-called Volcker rule “will get pretty far” in curtailing risk in the financial system, Chilton said yesterday at FX12, a foreign-exchange conference sponsored by Bloomberg LP in New York. Chilton, 52, oversees trading of derivatives such as credit-default swaps, which helped fuel the credit crisis.

The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, is a provision of the 2010 Dodd-Frank Act limiting proprietary trading by banks that take consumer deposits. The Depression-era Glass-Steagall Act forced investment banks to be separate from firms that held government-insured deposits. Then-President Bill Clinton repealed the law in 1999.

“There is a troublesome duplexity between having two different visions” at one firm, Chilton said. “Volcker for me will quit that troublesome duplexity. I don’t know if we need to go back to Glass-Steagall.”

The Volcker rule, which also caps the amount banks can invest in private-equity and hedge funds, has yet to take effect. The rule-making process has been too slow, Chilton said.

The rule allows banks to continue activities that are considered hedging, which is when a firm uses a trade to reduce potential losses. This could be a “humongous loophole,” Chilton said.

JPMorgan Chase & Co., which lost at least $6.2 billion this year on a wrong-way bet on credit derivatives, said the original purpose of those trades was hedging. Lawmakers including Senators Carl Levin of Michigan and fellow Democrat Jeff Merkley have called for regulators to tighten this exemption.

The CFTC is pushing through new rules governing the trading of interest-rate and credit-default swaps. The regulator is moving these trades to central clearinghouses and requiring that customers post more collateral. Without these rules, “systemic risk” will continue and there will be more taxpayer bailouts of financial firms, Chilton said.

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