WASHINGTON (Reuters) – Washington policymakers should tighten the Volcker rule’s ban on bank’s speculative trades by reining in an exemption for hedging activity, former U.S. bank regulator Sheila Bair said on Thursday.
Speaking at a roundtable hosted by the U.S. Commodity Futures Trading Commission, Bair said Volcker rule exemptions should be strictly defined and that banks should have to publicly disclose their hedges.
“I would tighten the rule,” she said. “A hedge should not be allowed unless it is a hedge.”
Bair, who stepped down as chairman of the Federal Deposit Insurance Corp last year, has been an outspoken critic of Wall Street excess and is still an influential voice in Washington.
The Volcker rule, part of the 2010 Dodd-Frank financial reform law, has been seen as a critical tool to rein in the type of excessive risk-taking that fueled the financial crisis.
The forthcoming rule would ban banks that receive government backstops such as deposit insurance from trading for their own account. Regulators issued a Volcker rule proposal in October that vaguely allowed for key exemptions to allow banks to hedge risk and make markets for customers seeking to trade securities.
Banks have actively lobbied for broadly defined exemptions, but those efforts have been weakened since JPMorgan Chase & Co announced earlier this month it lost at least $2 billion on a botched hedging strategy. Since that announcement, potential losses have mounted.
CFTC Chairman Gary Gensler said Thursday’s roundtable was not convened to specifically discuss JPMorgan’s recent trading loss, but said the revelation may be instructive for regulators as they finalize the Volcker rule.
Gensler also acknowledged that it will be challenging for regulators to ban proprietary trading while still allowing for protective hedges.
STILL ON MESSAGE
Despite the JPMorgan trading debacle, the financial industry on Thursday continued to argue that a very narrowly defined exemption would damage liquidity by discouraging banks from making markets and hedging risk.
“A diversified bank is a safer bank,” said Shawn Johnson, investment committee chairman of State Street Global Advisors.
He said banks would become more vulnerable to crises if they “go backwards” and concentrate primarily on taking deposits and making loans, to avoid violating a tough Volcker rule.
Bair and other reform advocates disagreed.
“My ideal world would be insured banks would be restricted to traditional commercial banking,” Bair said.
More Top Picks Best Weighted Vests For Autism
To strengthen the Volcker Rule, hedges should be publicly disclosed and banks should continuously disclose how a hedge is performing, she said. The former regulator added that the rule should ban any compensation based on profits from the hedges.
“A good hedge should lose money,” she told the panel.
Bankers at the roundtable argued that definition was too simplistic.
“Just because a hedge desk happens to make money for one month or one quarter…doesn’t necessarily mean that that is a profit center,” said Dan Rodriguez, a chief risk officer at Credit Suisse.
The Volcker rule was slated to be finalized by July but regulators have indicated they will likely miss the deadline. Banks will have until 2014 to fully comply.
(Editing by Leslie Adler)