Paul Volcker vs. the Bank of Canada

[ProSense]

Paul Volcker vs. the Bank of Canada

By SIMON JOHNSON

The Volcker Rule is intended to curb “proprietary trading” – specifically, high-risk bets placed by our largest banks. The Dodd-Frank financial reform act put it into law, and the relevant regulators have proposed a detailed and credible set of regulations to make it work...Responsible regulators around the world are cheering from the sidelines, and that’s why I was shocked to see the recent comment letter from the Bank of Canada that criticized the American law.

The legislative intent behind the Volcker Rule is clear – and reaffirmed in detail in the comment letter by Senators Jeff Merkley of Oregon and Carl Levin of Michigan, the co-authors of the relevant part of the Dodd-Frank legislation.

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In its letter, the Bank of Canada states that Volcker Rule provisions should apply only to entities that are or could damage American-insured depository institutions (see the last paragraph on Page 3). But we are far beyond worrying only about banks that have backing from the Federal Deposit Insurance Corporation.

In the post-Lehman and post-A.I.G. world, operating within the legislative framework of Dodd-Frank, smart regulators think in terms of “systemically important financial institutions.” What really matters is whether an individual bank or other financial-service company is so big or so important to the system that its failure could bring down many others. Some institutions designated systematically important have federally insured deposits; others do not (just as Lehman Brothers did not when it failed in September 2008).

The legislative intent of Dodd-Frank is most definitely to identify and limit system risk wherever it occurs, including outside the banking system. The Volcker Rule is just one essential part of this effort.

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http://economix.blogs.nytimes.com/2012/02/16/paul-volcker-vs-the-bank-of-canada/

[ProSense]

1. Kick

for regulation.