Comments on: Volcker’s rule on rules http://blogs.reuters.com/barbarakiviat/2010/10/29/volckers-rule-on-rules/ Thu, 17 Nov 2011 21:05:26 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: macroresilience http://blogs.reuters.com/barbarakiviat/2010/10/29/volckers-rule-on-rules/comment-page-1/#comment-129 macroresilience Fri, 29 Oct 2010 19:44:36 +0000 http://blogs.reuters.com/barbarakiviat/?p=245#comment-129 I think Volcker is broadly correct in insisting on a principles-based ban rather than a narrowly defined one. The clearer and more detailed the regulation, the easier it is for market participants to arbitrage it. The problem however with this idea is that ignores regulatory capture - If we had a constant supply of Paul Volckers to enforce the vague rule, I'd sign up for it. As Steve Waldman says here http://www.interfluidity.com/v2/215.html : "An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing." Lewis is also correct in that the only way to make clear rules that cannot be gamed is if they are draconian as I argue here: http://www.macroresilience.com/2009/12/05/regulatory-arbitrage-and-the-efficiency-resilience-tradeoff/ You've essentially hit upon why solving the incentive problem in banks via regulations is almost impossible. The only valid solution is to ensure that banks take their losses. I think Volcker is broadly correct in insisting on a principles-based ban rather than a narrowly defined one. The clearer and more detailed the regulation, the easier it is for market participants to arbitrage it. The problem however with this idea is that ignores regulatory capture – If we had a constant supply of Paul Volckers to enforce the vague rule, I’d sign up for it. As Steve Waldman says here http://www.interfluidity.com/v2/215.html  : “An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.”

Lewis is also correct in that the only way to make clear rules that cannot be gamed is if they are draconian as I argue here: http://www.macroresilience.com/2009/12/0 5/regulatory-arbitrage-and-the-efficienc y-resilience-tradeoff/

You’ve essentially hit upon why solving the incentive problem in banks via regulations is almost impossible. The only valid solution is to ensure that banks take their losses.

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