Friday, March 6, 2009 0 comments ++[ CLICK TO COMMENT ]++

Volcker suggests commercial and investment banks be split

Echoing something that I have been a proponent of, highly respected central banker Paul Volcker suggests that banks' commercial and investment operations be split:

Commercial banks should be separated from investment banks in order to avoid another crisis like the U.S. is experiencing, according to former Federal Reserve Chairman Paul Volcker.

“Maybe we ought to have a kind of two-tier financial system,” Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, said today at a conference at New York University’s Stern School of Business.

Commercial banks would provide customers with depository services and access to credit and would be highly regulated, while securities firms would have the freedom to take on more risk and practice trading, “relatively free of regulation,” Volcker said.

Volcker’s remarks indicated his preference for reinstating some of the divisions between commercial and investment banks that were removed by Congress’s repeal in 1999 of the Great Depression-era Glass-Steagall Act.

I'm just some guy off the street with no involvement with banks and have zero influence on anything but I have always repeated that the shadow banking system should be seperated from the conventional banking system. Since I'm a "free market guy" I am against trying to ban credit default swaps or heavily regulate hedge funds and the like. I don't think that can be accomplished but it is possible for the government to block conventional banks from getting entangled with the shadow banking system. Volcker is suggesting something along

I think independent banks, unrelated to "normal banking", should play around in the shadow banking system. They will make a lot of money but they will also blow up spectacularly but that's ok. The conventional banks should be prevented from funding hedge funds, investing in dubious assets, and so forth.

Now that nearly all banks in America are bank holding companies regulated by the Federal Reserve and various other agencies, I hope that the US government takes this opportunity to split the banks. These banks have no business borrowing money from taxpayers, and putting them at risk, while funnelling them into dubious assets or loaning them to risky clients.

Bankers aren't going to like any of this (since the shadow banking system provides higher profits when things go right and hence their high compensation) but their fate is out of their hands now.

Speaking as a Canadian, I think the Canadian regulators should also wall off the shadow banking system from the conventional banks in Canada. Although there haven't been any questionable issues so far in Canada, one can never be sure what is really going in the unregulated world. The market has sold off the Canadian banks and it's not clear if that is due to lower profitability in the future or if there is something nasty lurking in the background. I don't follow the banks and don't know much about them but I have read some stories implying that most of the profit growth--note that I'm referring to growth; most of the total profit still comes from retail and other conventional banking sources--for Canadian banks had come from trading, M&A activities, and various other categories. These aren't necessarily as questionable as lending to hedge funds/buying CDOs/etc undertaken by American banks. Nevertheless, I think Canadian banks should be prevented from entangling themselves in the shadow system.


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