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Volcker tackles long-term bank investments

Thursday 20 January 2011 - by Andrew Hickley

Former Federal Reserve chairman Paul Volcker has called for a crackdown on the longer-term investments banks can make, while praising a study furthering the implementation of his self-titled rule.

Volcker told the FT that longer-term banking activities should be examined as part of the passing of the Volcker Rule, which aims to ban banks from speculative trades on their own balance sheets.

Banking regulation will still allow institutions to pursue their investments in seemingly less risky, longer-term 'merchant banking', alongside grudgingly allowing banks to invest 3 per cent of their capital in hedge funds and private equity firms.

And Volcker has called for the lengthy list of investments that banks can make to be redefined, aiming to remove any riskier long-term trades off of their balance sheets.

"Potentially what is 'merchant banking' and what is a 'proprietary trade' needs some delineation," he says.


Longer-term investments have been criticised in some quarters for their role in the financial crisis, with regulators admitting that these ventures had contributed to the fall of shadow banking firms Bear Stearns and Lehman Brothers.

Overall however Volcker is reported to be satisfied with the conclusions of FSOC's study, which was approved at an FSOC meeting yesterday.

The report recommended 10 measures, including restricting all impermissible proprietary trades alongside a requirement for all CEOs to attest that their compliance schemes enforcing the rule's provisions are up to scratch.

However Federal Reserve chairman Ben Bernanke admitted in the meeting that there is still "a lot more work to be done" towards implementing the controversial rule by a September deadline.


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