Yesterday, regulatory heads from the SEC, Federal Reserve, FDIC, and CFTC addressed two congressional subcommittees regarding the Volcker Rule. They showed spine, commitment and solidarity towards the Rule, which should give heart to Main Street. It’s about time.
Detractors argue that the Rule, which forces banks to return to their role as basic depositor and lender, limits the banks’ ability to “make markets,” politician-speak for “bet the farm.” This will negatively impact liquidity, making it harder for investment capital to reach those that seek it, they argue. Blah blah blah. And needless to say they find “friends” in Congress (read: recipients of donations) to beat the drum. Well this time, the administration is not budging. Can you say, “Election year”?
Here’s the bottom line. Banks have served two distinct functions this millennium, one as deposit holders and lenders, and one as investors. The deposit-holding and lending function (the actual banking) serves Main Street. The risky investments—or “market-making” if you listen to bank lobbyists—serve the bank executives at the risk of depositors. The Volcker Rule allows banks to hedge risk but make no other investments.
Investing—for example, in incomprehensible derivatives that include AAA-rated, subprime mortgages not worth the ink in which they’re written—is not the role of a bank. It is the role of separate institutions, which will certainly step up to fill the void. And when they step in, they won’t be risking the deposits of unwitting taxpayers.
Dodd-Frank gives banks two years to comply with the Volcker Rule, and they’d better get changes underway. The regulators are—knock on wood—finally serious and unified in their efforts. Bankers beware. Main Street, rejoice.
Assisted by David T. Martin
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