Counterparties: Volcker with voltage
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Two years after the endlessly delayed Volcker Rule was first passed, there’s been a slow, rough convergence in how the world treats too-big-to-fail banks.
Today, George Osborne, the UK’s chancellor of the exchequer, announced a series of new powers that will force banks to separate their trading and lending operations — or face being broken up. This is the year, Osborne said in a speech, “when we re-set our banking system.” In France and Germany, something similar is going on: both countries are considering Volcker-ish proposals to that would force banks to silo off everyday banking from things like prop trading and financing hedge funds.
Building off of a government commission’s 2011 recommendation, Osborne’s approach, which he calls an “electrified ring-fence”, relies on four elements: the Bank of England will soon take over responsibility as a “super cop” for the economy; banks’ trading activities will be severed from their retail lending operations; the UK will somehow go about “changing the whole culture and ethics of the business”; and there will be more choice in a banking system which “verges on an oligopoly”.
The FT suggests Osborne’s words are a threat; Lex wonders if that threat is mostly empty. Reuters quotes a government source saying the move was intended “to send a signal to Europe” to move faster on reform (it also says Osborne was “bowing to political pressure”). And the British Bankers Association says a clear separation between trading and banking would create “uncertainty” for the industry.
“Behind closed doors”, bankers say they are not particularly worried about Osborne‘s fence. Much scarier for the banking industry is a growing chorus that’s arguing big banks may need to be broken up — a group which includes bank critics like Michael Lewis, free-market adherents like Alan Greenspan, and ex-bankers like Sandy Weill. In the US, new rules on big banks are being “absolutely driven by a sense that Dodd-Frank did not end too big to fail”, a Cato Institute staffer told Bloomberg. — Ryan McCarthy
On to today’s links: