...demonstrating that a Golden Rule inspired business conduct leads to a superior judgment in finance and public policy ... ... "Don't do to others what you don't want them to do to you"... |
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Poor Bank Examiners!
Dialogue with the Alter Ego on the new Volcker Rule, drafted and published on Dec. 12, 2013
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Question by Alter Ego of Noah denkt™ (AE): In the course of the last few days a new Volcker Rule, i.e. a rule
that regulates and limits speculation activities of commercial banks with a more than US$50 billion balance
sheet has been formally adopted in the US. That, in a way, validates one of your earlier predictions, according
to which it would be necessary, albeit in due time, to impose a certain degree of restrictions on bank
conglomerates. Does Noah denkt™ feel vindicated by this latest development?
Answer by Noah denkt™ (Nd): As you know, it took us sometime to come around and support a new Volcker
rule. Now, that it has happening, we do in deed feel somewhat vindicated. Nevertheless it seems to us as if the
new rule has serious defects since it is quite bureaucratic and puts way too much stress on the work of the
bank examiners.
AE: Why do you say that?
Nd: Well, under the new statute big banks are now required to have an even more detailed program that
documents in writing the compliance procedures which the bank observes in order to be in sync with their own
risk exposure limits and the various provisions of the Volcker Rule. For example, a big bank will now have to
demonstrate in writing why a certain hedging position is reducing identifiable risk, which other position it is
actually hedging and how the risk exposure of that hedge is evolving under the gyrations of the market place.
Now, imagine the poor bank examiner who supposedly has to review not only the existence of such paperwork
but also the viability of the arguments presented therein. It seems to us that it is pretty unreasonable to
presume that any group of bank examiners could possibly go to that depth of supervision.
AE: Okay, but the main point of the new Volcker rule is that it prohibits banks from proprietary trading, i.e.
trading with its own money as opposed to working with its customers’ money. That is a big achievement, isn’t it?
Nd: Certainly, it is, even though big banks will still have some discretion in deciding whether certain trades are
permissible market-making or not.
AE: So why do you worry about petty, little details when the big picture of the new rule is clearly positive?
Nd: First, because it is quite likely that big banks will outsmart their supervisors given the complexity of the new
rule. Second, standard wisdom tells us that all this paperwork will be quickly ignored once a new super bubble
develops in the financial markets. And third, it continues to be clear to us that the government will eventually
come under pressure again to bail-out financial institutions, even if the latter won’t be covered by a Federal
deposit insurance guarantee.
AE: You are reverting here to our first Volcker rule-dialogue that emphasized the systemic risk of organizations
such as BlackRock and the now defunct Long Term Capital Management?
Nd: Correct.
AE: So you continue to believe that the BlacRocks of this world will be the ultimate beneficiaries of the new
Volcker rule?
Nd: Quite likely so.
Dialogue with the Alter Ego on the new Volcker Rule, drafted and published on Dec. 12, 2013
----------------------------------------------------------------------------------------------------------------------------
Question by Alter Ego of Noah denkt™ (AE): In the course of the last few days a new Volcker Rule, i.e. a rule
that regulates and limits speculation activities of commercial banks with a more than US$50 billion balance
sheet has been formally adopted in the US. That, in a way, validates one of your earlier predictions, according
to which it would be necessary, albeit in due time, to impose a certain degree of restrictions on bank
conglomerates. Does Noah denkt™ feel vindicated by this latest development?
Answer by Noah denkt™ (Nd): As you know, it took us sometime to come around and support a new Volcker
rule. Now, that it has happening, we do in deed feel somewhat vindicated. Nevertheless it seems to us as if the
new rule has serious defects since it is quite bureaucratic and puts way too much stress on the work of the
bank examiners.
AE: Why do you say that?
Nd: Well, under the new statute big banks are now required to have an even more detailed program that
documents in writing the compliance procedures which the bank observes in order to be in sync with their own
risk exposure limits and the various provisions of the Volcker Rule. For example, a big bank will now have to
demonstrate in writing why a certain hedging position is reducing identifiable risk, which other position it is
actually hedging and how the risk exposure of that hedge is evolving under the gyrations of the market place.
Now, imagine the poor bank examiner who supposedly has to review not only the existence of such paperwork
but also the viability of the arguments presented therein. It seems to us that it is pretty unreasonable to
presume that any group of bank examiners could possibly go to that depth of supervision.
AE: Okay, but the main point of the new Volcker rule is that it prohibits banks from proprietary trading, i.e.
trading with its own money as opposed to working with its customers’ money. That is a big achievement, isn’t it?
Nd: Certainly, it is, even though big banks will still have some discretion in deciding whether certain trades are
permissible market-making or not.
AE: So why do you worry about petty, little details when the big picture of the new rule is clearly positive?
Nd: First, because it is quite likely that big banks will outsmart their supervisors given the complexity of the new
rule. Second, standard wisdom tells us that all this paperwork will be quickly ignored once a new super bubble
develops in the financial markets. And third, it continues to be clear to us that the government will eventually
come under pressure again to bail-out financial institutions, even if the latter won’t be covered by a Federal
deposit insurance guarantee.
AE: You are reverting here to our first Volcker rule-dialogue that emphasized the systemic risk of organizations
such as BlackRock and the now defunct Long Term Capital Management?
Nd: Correct.
AE: So you continue to believe that the BlacRocks of this world will be the ultimate beneficiaries of the new
Volcker rule?
Nd: Quite likely so.
| © Landei Selbstverlag, owned by Wilhelm ("Wil") Leonards, Gerolstein, Germany. All rights reserved. Reminder: Noah denkt™ is a project of Wilhelm ("Wil") Leonards and his Landei Selbstverlag (WL & his LSV). Consequently, all rights to the texts that have been published under the Noah denkt™brand name are reserved by WL & his LSV. The commentary and the reasoning that was provided on this page is for informational and/or educational purposes only and it is not intended to provide tax, legal or investment advice. It should therefore not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or any issuer by WL & his LSV or its Noah denkt™ Project. In fact, WL & his LSV encourage the user to understand that he alone is responsible for determining whether any investment, security or strategy is appropriate or suitable for him. And to leave no doubt as to what this means we urge our user to also note our extended Legal Notice. |
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| Keywords: New Volcker Rule, Compliance Provisions of the new Volcker Rule, systemic risk after the new Volcker rule, bail-out pressure after the new Volcker rule, challenges fpr bank examiners, challenges for bank supervisors, documentation requirements of the new Volcker rule |
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