Volcker on the Volcker Rule

On Monday, April 8th NYU’s Stern School hosted a interview with Sir John Vickers, former Chief Economist of the Bank of England and Chair of the Independent Commission on Banking and former Fed Chair Paul Volcker. Gillian Tett of the FT moderated.

One of the topics that was sure to come up was the Volcker Rule. Chairman’s Volcker’s comments were interesting. We are paraphrasing (and maybe editorializing a bit of) what he said. He noted that five governmental agencies plus the Treasury Department were negotiating the rules covering implementation and they had made a mess of it. We have seen  how the Volcker Rule was morphing into a complicated monster and it appears that Mr. Volcker shares that sentiment.

Chairman Volcker noted that when lots of groups get involved writing regulation, the process becomes bureaucratic and politicized  — not a good result. He also talked about granularity and regulation. Volcker told a story about how the Basel Commission initially assigned uniform RWA weightings to corporate loans, not differentiating between loans to small enterprises from those to, say, General Motors. The implication was that GM loans were less risky, yet still carried the same RWA as loans to their riskier brethren. (Chairman Volcker could not resist an aside about the irony of GM’s bankruptcy.) The equalized RWA was the price paid to avoid the same kind of granularity that is crippling, for example, the Volcker Rule implementation. We know that too often complexity is the mother of regulatory arbitrage and encouraged by those being regulated.

Of course the other side of the equation is painting the world with broad brushstrokes can end up “throwing the baby out with the bathwater”.

There is an elusive middle ground, we hope. We think there is something to the calls to simplify Basel III, Dodd-Frank, and other regulations before they go so far down the rabbit hole that they will never get out. Take a look at the SFM post from Sept. 4, 2012 “An excellent argument for reducing Basel capital rules from a Bank of England paper”Don’t assume simplification means less effective regulation. 

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