Banks urge EU to avoid a copy of Volcker rule
BANKS are urging the EU to avoid imposing its own version of the US’s new Volcker rule despite claims from some quarters that it would have prevented JP Morgan’s recent $2bn trading loss.
In a confidential lobbying paper seen by City A.M., Europe’s banks argue that an EU version of Volcker would be “detrimental” to the aim of GDP growth and say it would have a “negative effect on banks’ ability to serve the real economy”.
The paper has been drafted collectively by Europe’s biggest banks for submission to a special Brussels taskforce called the Liikanen Commission, which is examining whether to force structural reform on the sector along the lines of the Volcker rule or the UK’s Vickers Commission.
The Volcker rule, which is being introduced by the US, bans lenders from making bets with excess deposits for profit (known as proprietary or prop trading), restricting them only to hedging their risk. JP Morgan has come under fire for blurring the line between the two and losing $2bn – $800m post-tax – in the process.
But banks argue that Volcker is “difficult to implement” precisely because of the inability to distinguish between hedging and prop trading. “This can lead to possible avoidance but also excessive discretion by supervisors to define scope,” the paper says. The fear is that if the EU does adopt its own version of Volcker, it could accompany it with highly intrusive regulators.
Banks also say that Volcker will cause liquidity to dry up in some vital markets and “does not really address the moral hazard issue related to government guarantees”. Instead, they say regulators should focus on living wills – plans for how to wind up big, unwieldy banks that fail without a taxpayer bailout.
More broadly, lenders are anxious to persuade Brussels that any structural reform is unnecessary and cannot help “harming the effective functioning of the European financial sector and hence the European economy”.
But the banks don’t rate their chances of success very highly. It is understood that they are also discussing a “plan B” lobbying strategy should their arguments fail.