Examining the Impact of the Volcker Rule on Markets, Businesses, Investors, and Job Creation, Part II
Dec 13, 2012
Publisher: Milken Institute

On December 13, 2012, Milken Institute Senior Finance Fellow James R. Barth testified before the United States House of Representatives Committee on Financial Services about section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Volcker Rule.

Noting that his opinions are his own, Barth said, "I believe the Volcker Rule is based on an incorrect premise, will be extremely difficult to implement, and, worse, will produce harmful economic effects."

According to Barth, "There is no evidence to support the belief that proprietary trading was a cause of the recent or any other financial crisis. In fact, all the evidence points to the contrary. The most recent crisis was triggered by poor lending and underwriting practices in the real estate sector, and excessive leverage by and insufficient liquidity at banking entities, not by proprietary trading by banks." He went on to discuss the difficulty he foresees in implementing the Volcker Rule, because it would require regulators to distinguish between permissible activities and prohibited ones that appear similar.

"As banks are denied the opportunity to engage in profitable trading activities, they may be driven to engage in ever more risky activities in an attempt to provide investors with an acceptable return. The Volcker Rule may therefore lead to riskier, not less risky, banks," Barth said.

He pointed out that among large trading losses (greater than $1 billion) since 1990, only four of the 15 institutions involved were banks. The rest were investment banks, hedge funds, a local government, or manufacturing or petrochemical firms.

Barth concludes, "The focus of regulation should therefore be on ensuring that banking entities have sufficient capital commensurate with their risk, not on separating some investment bank activities from commercial banking," To read his full testimony, click here.