Big Bank Obesity Conundrum

by Chidem Kurdas

Is the Federal Reserve a hotbed of trustbusters? Fed officials (as well as some academics) have been calling for forcible downsizing of big banks . “I am of the belief personally that the power of the five largest banks is too concentrated,” Dallas Federal Reserve Bank president Richard Fisher said a few days ago during a visit to Mexico, according to news reports. He’s expressed similar views before, as has Thomas Hoenig, former president of the Kansas City Fed.

Here on ThinkMarkets Jerry O’Driscoll, a Federal Reserve veteran, wrote: “There is no conceivable efficiency gain that justifies the risk these gigantic, risky institutions impose on all of us,”

Menace to Savings and Small Businesses

by Chidem Kurdas

As the old adage goes, be careful what you ask for, you might just get it. After the 2008 crisis it became fashionable to complain that too much trading is going on. There were calls in this and other countries to restrict financial transactions. And it happened. One example is the rule named after Paul Volcker in the 2010 Dodd-Frank law, banning depository banks’ trading on their own accounts (and also forbidding them from holding significant hedge fund or private equity interests).

Regulators are still in the process of determining how to implement the Volcker rule but the potential impact is already discernible. Likely victims include millions of Americans who save for their retirement and smaller companies that need to borrow money.

Three Aspects of the Volcker Rule

by Chidem Kurdas

Former Federal Reserve chief Paul Volcker and President Obama want to force banks to get rid of their proprietary trading operations, hedge funds and private equity funds. There is more to this policy initiative that meets the eye at first glance.

Mr. Volcker in effect gives two unrelated rationales. One is that “adding further layers of risk to the inherent risks of essential commercial bank functions doesn’t make sense…” So, banish speculative trading to reduce risk.

Put that way, it sounds reasonable enough. The only problem is that it has no real connection to the crisis of 2008 and would almost certainly have no role in preventing  credit cycles, of which the crisis was a manifestation. This irrelevance is presumably why it was not included in the mammoth financial regulation bill making its way around Congress.