Bank of Canada’s Carney Says Volcker Rule Might Damage Markets
Bank of Canada Governor Mark Carney said U.S. efforts to prevent deposit-taking banks from trading with their own money could damage markets in government bonds and other securities unless the plans are revised.
U.S. regulators’ latest draft of the so-called Volcker rule may prevent banks from buying securities while conducting trades for clients, Carney said in an interview with Bloomberg Television’s Erik Schatzker at the World Economic Forum in Davos, Switzerland.
“It is not clear the definition of ‘market-making’ versus ‘proprietary trade,’” Carney said. “There appears to be a presumption that something is proprietary,” adding “we think that it should go in reverse.”
The Volcker rule, named after former U.S. Federal Reserve Chairman Paul Volcker, 84, seeks to stop regulated banks that receive support from the government from making risky bets with their own money. Goldman Sachs Group Inc. (GS), the most profitable securities firm before converting to a bank in 2008, is among Wall Street companies that have argued the limitations could harm capital markets by reducing the role of banks.
Carney, 46, has become one of the world’s most important financial policy makers since he was named in November to succeed Mario Draghi as chairman of the Financial Stability Board. Group of 20 leaders have charged the FSB with making recommendations for global financial reform and to monitor progress. Draghi stepped down after becoming president of the European Central Bank. Carney and Draghi both held roles at New York-based Goldman Sachs earlier in their careers.
“I am speaking from my perspective at the Bank of Canada,” Carney said. “We and other officials in Canada have looked at the current draft of the Volcker rule and we have some obvious concerns.”
The Volcker rule, as currently written, exempts any trades in U.S. government securities from the prohibition. Unless the same exemption is provided to other countries’ government bond markets, it could drain trading activity, he said.
“No other government bond market is carved out,” he said. “U.S.-based institutions are significant players in those markets, and so there is a potential for real liquidity change.”
Carney isn’t the first official from outside the U.S. to criticize the Volcker rule for its potential effects on markets. Ontario Finance Minister Dwight Duncan said in a Jan. 25 interview at Bloomberg’s headquarters in New York that Canada’s federal and provincial governments should get the same exemptions to the rules that are granted to U.S. governments.
“We’re very concerned about the Volcker rule and its unintended consequences for us,” he said.
Japan’s central bank and financial regulator, in a letter to U.S. authorities on Dec. 28, said the rule would increase the cost of trading Japanese government bonds unless it was amended to exempt them. The European Union’s internal market commissioner, Michel Barnier, plans to raise objections to the Volcker rule with U.S. Treasury Secretary Timothy F. Geithner next month, the Wall Street Journal reported last week.
Carney said the rule could freeze trading in markets outside the U.S. because of uncertainty over how it could be applied to “any U.S.-based infrastructure.”
The rule also has been criticized within the U.S. by House Republicans and banking-industry groups. They have said the draft, proposed by four agencies in October and by the Commodity Futures Trading Commission this month, sows confusion about which activities are permitted and puts U.S. firms such as Goldman Sachs and New York-based JPMorgan Chase & Co. at a competitive disadvantage to overseas rivals.
Fed Governor Daniel Tarullo and top officials from the CFTC and three other agencies defended the 298-page rule at a Jan. 18 hearing before a House Financial Services joint subcommittee in Washington, faulting Congress for imposing complexities in the Dodd-Frank Act, which mandates the rule.
“There is a lot of concern” in other countries about the rule, Michael Gregory, a senior economist at Bank of Montreal in Toronto, said in a phone interview. “We would probably notice the absence of liquidity in Canada of those U.S. institutions and more so in Europe,” where the sovereign-debt crisis has roiled markets.
Carney’s role at the Financial Stability Board adds more weight to the criticism of the rule, John Clinkard, economist at Deutsche Bank AG in Toronto, said in a telephone interview.
Lloyd C. Blankfein, Chairman and Chief Executive Officer of Goldman Sachs, said at a Nov. 15 investor conference that he expects clients to push back against the Volcker rule when they realize the potential harm it could do to markets. Goldman Sachs, the fifth-biggest U.S. bank by assets, made 60 percent of its revenue from trading last year.
“Most of the questions we’re responding to at this point are questions that our clients have for what the consequences will be to them,” Blankfein, 57, said at the time. “If we’re hearing about it directly, I think user groups will chime in and make their interests known. In fact, I’m sure of it.”