The new Volcker rule comes at an opportune time for banks, which are
poised to ride a new wave of global market volatility.
The proposed
changes unveiled by the Federal Reserve Wednesday would preserve the
prohibition on proprietary trading by banks that enjoy government backstops.
But it lightens and simplifies enforcement of the rule, giving bank managers
more leeway to set limits on trader behavior.
For banks with big trading operations, the most immediate impact will be
lower compliance costs. While welcome, this is unlikely to affect their share
prices. The bigger question is will the rule change lift bank trading revenue.
Regulators and bankers all insist they support the principle behind the
Volcker rule, so a big increase in trading activity is unlikely. What’s more,
trading volumes have been held down for years by global factors, including
bond-buying by central banks that has suppressed volatility. As a result,
fixed-income trading revenue at major global banks has fallen in six of the
past eight years, according to data from research firm Coalition.
But these trade-muffling forces are beginning to subside. With the Fed now
raising rates and shrinking its balance sheet, and the sudden return of
eurozone-crisis fears, volatility is back in the markets.
Speaking at a conference on Wednesday, Citigroup Chief Executive Michael
Corbat said he expects this environment to create more market-making
opportunities for big banks like his with global balance sheets. “As
quantitative easing moves to quantitative tightening, the central-bank bid goes
away, and the value of liquidity and intermediation goes up,” he argued.
Volcker 2.0 gives banks more flexibility to take advantage of the
shifting landscape. The difference will be subtle but potentially significant.
During episodes of volatility and other market displacements, bank managers may
be just a bit more likely than before to clear an aggressive market-making
trade.
In early 2016 for instance, a single Goldman Sachs trader famously
netted more than $100 million in profits by scooping up billions of
dollars of junk bonds during a global market panic, and then unloading them
once conditions settled. Expect there to be more trades like this under the new
regime, with less accompanying controversy.
This increased liquidity provision will make the overall market run
smoother, though hopefully without banks taking on too much risk. It is now up
to regulators, and banks, to show they can strike that balance.
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here for the original article rom The Wall Street Journal.