Volcker Rule Is Irrelevant to MF Global Collapse: Frank Keating
Schadenfreude is misplaced when considering the wreckage of a financial firm in today’s weak economy. Yet empathy for the employees of MF Global Holdings Ltd. and the investors who owned its shares also is compatible with gratitude that no government agency came to the rescue.
The policy of saving prominent firms from their mistakes has to end. The willingness of regulators to let a well- connected investment house suffer the consequences of investments gone bad signals that government bailouts are on the outs. That is as it should be. Every financial business -- bank or non-bank -- should succeed or fail by how efficiently and successfully it meets its customers’ needs. Good regulation should reinforce that market discipline, not mute it.
This brings me to the Volcker Rule. Some wrongly assert that the MF Global failure is a vindication of the Volcker Rule, which prohibits proprietary trading at commercial banks. In fact, if the rule were in effect today, it wouldn’t have changed MF Global’s fate. That’s because MF Global wasn’t a bank or anything like one. Moreover, even if MF Global had been part of a commercial lender, its regulators never would have allowed the broker-dealer to approach the kind of investment concentration levels that sank the company.
Banks are financial institutions whose risk management is heavily supervised. No industry is subject to more on-the- premises and in-the-books examination on a continual basis than the banking industry. Safety and soundness examinations, in particular, are intense, testing the quality of assets and of risk management.
Check the Box
The Volcker Rule would replace much of this examination program with a complex set of rules intended to take much of the judgment away from bankers and their regulators and turn risk management into a convoluted check-the-box compliance exercise.
How did such an unobjectionable idea -- that banks should avoid excessive speculative risks like those that brought down MF Global -- go so awry? The twofold mission of the Volcker Rule, to stop excessively risky proprietary trading and fund investments, was always easier to state than to explain. When asked to define proprietary trading, former Federal Reserve Chairman Paul Volcker -- after whom the rule is named -- responded that you know it when you see it. That’s pretty tough to translate into an operable law, as demonstrated by the 200- page preamble to the regulators’ proposed rule, and the almost 400 questions presented for public comment.
The Volcker Rule exercise might be an interesting experiment if its consequences weren’t so serious. Many customers rely on banks for services that support the success of their own businesses. Contrary to advertisements, the Volcker Rule doesn’t focus solely on the five or even dozen largest lenders operating in our national money centers. The proposed rules would reach more than 1,000 banks, which in total operate in almost all cities and towns in the U.S. These financial institutions touch a lot of people and employers, who rely on their services.
Consider the critical role of banks in business development, helping a growing company make the transition from a startup enterprise reliant upon its partners’ funds and bank loans, to one that is ready to seek funding in the marketplace. The company may be too small to go to Wall Street, but not too small to invite local investors. Banks have traditionally helped businesses take that important next step, often by supporting local-business investment funds, such as small-business investment companies.
The Volcker Rule makes it difficult to continue that kind of support. Instead of defining what banks can’t do, it defines what they can do. This forces bankers to work their way through a labyrinth of rules and definitions to see if their investments qualify for an exception to the ban. In so discouraging such investments, the proposed regulation compromises banks’ ability to support economic growth and job creation.
The proposal also hurts U.S. banks’ global competitiveness. When the Volcker Rule was first floated, its sponsors asserted and assumed that the rest of the world would follow the U.S. lead. I have met with international bankers, most recently at a global banking leadership conference in Seoul. I can affirm that financial companies outside the U.S. are watching the Volcker Rule implementation very carefully, but have no plans to copy it. They are poised to pick up the businesses and customers that it would cause U.S. banks to abandon.
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