Irony of Ironies

The "European Volcker Rule" is emerging!  What we like about the linked article is the broader principle poking through the surface.  To wit:

    "... separate large banks' riskier trading activities from their deposit-taking business ... to keep client deposits and other operations [eg, payment processing] serving the real economy from being affected by a bank's failure."

                                                    AND

    "Several lawmakers argue all trading activities should be completely separated from the retail operations."

    What we see taking form is advocacy of "narrow banking" and "full reserve banking."  Europe - especially the UK - has hosted far more debate on these innovations than the US.  In brief, the innovation is that banks retain all deposits.  No lending, no risk-taking, nothing!  Banks would be free to pursue their normal activities of lending and market-making but could do so only with segregated equity and debt capital.

    It's simple.  It's transparent.  It will end bank bailouts (because it's politically feasible to let the banks fail).  Largely speaking, both bankers and regulators hate the idea - which means it must be right.

 

Quantum Mechanics and the Volcker Rule

Nearly 100 years ago, a great physicist surmised "if particles behave like waves, there must be a wave equation."  Next thing you knew, the world had the Schrodinger Equation of Quantum Mechanics.

Now the World of Banking has the Volcker Rule.  Regardless of your point of view, almost all would likely agree that US banks should have reduced risk once they shed the Volcker-prohibited activities.

Just as Schrodinger created the math to describe quantum wave functions, what we now need is for financial quants and regulators to create the models of economic and regulatory capital to show how much LESS CAPITAL banks should have post-Volcker implementation.

If the Volcker premise of risk reduction is correct, we should see the impact in bank capital models, right?!

Shakespeare and the Volcker Rule

If we were to strike the pose of Hamlet and ask:  Volcker Rule?  Or No Volcker Rule?  We'd go with "YES" and then add a forgettable soliloquy with phrases such as "no more bank bailouts" and "get the risky activity away from taxpayer support."

Sullivan & Cromwell today issued a good, lengthy discussion of Volcker.  (Thank Heaven for Executive Summaries and Tables of Contents!)

Supporting the Volcker Rule has its downside.  It is not "a step in the right direction."  The right direction is elsewhere - future posts will spill our thoughts!