Paul Volcker - former chairman of the US Federal Reserve and, under President Barack Obama, the Economic Recovery Advisory Board - spoke at a dialogue session organised by the Lee Kuan Yew School of Public Policy in Singapore last week. Here's his take on the Volcker Rule and how it compares with the UK's approach to financial regulation. The rule, which will be implemented next year, essentially limits US banks from using deposits to make large bets on their own account.
The Volcker Rule
"I don't know if people know what the Volcker Rule is. It's a big complicated piece of legislation that the Dodd-Frank Act passed a year ago, and it has a lot of things in it. One thing it has is the Volcker Rule."
"One basic question that arises then is should financial institutions with government protection and support engage in proprietary activity - speculative activity which is not related to their basic functions? Should tax payers support that kind of activity? So let's see some separation between proprietary activities - hedge funds, speculation - remove that from commercial banks. If you want to engage in that kind of activity, fine, but you shouldn't be a commercial bank."
The Volcker Rule has "given rise to a big, complicated regulation, much more complicated than I'd like to see...There's no one more important than the financial community lobbyists, whose whole function in life is to complicate legislation."
Would it have been better for the US to pump money into the economy, into infrastructure to create jobs, rather than bailing out the banks? "There's a lot of feeling that the stimulus package was not as effective as it could have been. Ideally, a lot of people would have liked infrastructure, but one of the reasons why that was not done was mainly due to the lack of political discipline. But in the midst of the recession, crisis, you can't turn on infrastructure overnight. It takes months typically."
US v UK
"The UK's approach is to isolate the retail bank from activities like proprietary trading. They are building a big, big wall there, so while one area of the bank is protected, the other part shouldn't benefit from government support at all, even though they are the same institution. Now that's a tricky thing to apply, so we'll see which works - we'll see how that comes out. They have a long phrasing period."
The US and UK are similar in that "we do not want the government bailing out big financial institutions any more - we don't want the tax payers at risk. There is still a lot of scepticism in the market that it [letting institutions fail] sounds good, but when push comes to shove, that's not what the government will do."