Persistent lobbying by the U.S. banking industry against closer regulation of market trading continues to stall adoption of the Volcker rule. That restriction, named after its chief advocate, former Federal Reserve Chairman Paul Volcker, would bar speculative propriety trading — banks’ use of federally insured customers’ funds — to earn profits. Had the rule not been jettisoned when the Glass Steagall Act was repealed by Congress in 1999, it likely would prevented the massive speculative trading which led to the disastrous financial crash of 2008 — and then to massive federal bailouts to prevent another Great Depression.
Ironically, the wrong-headed delay in re-establishing the rule has had at least one beneficial effect: It has provided ample time to showcase the need for even stricter oversight of banks’ transparency and reserve margins than would be imposed under the contested regulations still being written to implement the Dodd-Frank banking reform legislation of 2010.
Consider the headline banking scandals and downgrades just in the past two weeks.
Widening trading losses at JPMorgan Chase, now estimated at $9 billion, include billions in losses of investor funds that would have been avoided under a strict Volcker rule. Those losses, in turn, pale beside the alleged rigging by England’ global Barclays Bank of key interest rates used internationally to underpin approximately $360 trillion in loans, market trading, mortgages and financial contracts, many involving American homeowners, businesses and pension fund investments.
That broadening scandal, revealed when U.S. and British authorities announced a settlement with Barclays of $453 million in penalties last week, forced the quick-step resignations earlier this week of Barclays Chairman Marquis Aguis, Chief Executive Robert E. Diamond Jr., and chief operating officer Jerry del Missier. The settlement signed by Barclay officials cited admissions to fixing the benchmark London Interbank Offer Rate, known as the Libor rate, to boost trading profits and minimize losses over a five-year period.