NCPA - National Center for Policy Analysis

The Volcker Rule Could Be Disastrous for the United States

July 26, 2013

There is a disturbing and neglected question at the heart of the controversy over the Volcker Rule's prohibition of proprietary trading at bank holding companies: Are the prospective gains from these structural reforms worth risking the destruction of U.S. global universal banks (banks that are both commerical and investment banks) and a significant decline in the U.S. share of global capital markets? The answer is obviously no, says Charles W. Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia Business School and a visiting scholar at the International Monetary Fund.

  • The Volcker Rule is a major threat to banks' ability to continue acting as market makers (intermediaries that accept orders to buy and sell to maintain liquidity in the trading of particular financial instruments).
  • Proprietary trading cannot be distinguished as an activity from market making.
  • The two activities are not observably different on a transactional basis, but reflect different intent, which is not possible to observe.

Enforcement of the rule that focuses on identifying proscribed activities inevitably would impinge on banks' market making.

  • As economists recognize, that is a major problem; making global markets in financial instruments entails huge economies of scale, which means that global universal banks have a unique role to play as market makers.
  • There simply aren't any other financial firms that are large enough to substitute for global universal banks as market makers.

If U.S. banks cannot make markets, European and Asian banks will fill the gap, and may do so by trading in different markets located outside the United States. This is not a far-fetched possibility. Some people who may be affected by the Volcker Rule's consequences for the efficiency of capital markets have warned about the risks that all countries bear from rigorous enforcement of that rule.

The Volcker Rule is a serious threat to the continuing global preeminence of U.S. banks and capital markets. It will achieve little or no good, and will do so at a potentially high social cost. At the very least, we need to make sure that the rule is implemented in a way that does not disrupt market making by global universal banks. Even the successful construction of a regulatory safe harbor that insulates market making from the rule may place U.S. banks at a significant comparative disadvantage and result in substantial losses of client relationships to universal banks operating outside the United States.

Source: Charles W. Calomiris, "The Uncertain Dangers of the Volcker Rule," The American, July 22, 2013.


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