The latest endorsers for the so-called Volcker Rule separating riskier trading activity form government insured depository banks have gone public. Five former U.S. Treasury secretaries have called upon Congress to implement rules limiting both the size and trading activity of these banks.
The Treasury secretaries are John Snow, Paul O’Neill, Nicholas Brady, George Shultz and W. Michael Blumenthal.
In a letter to the editor, published this morning in the WSJ, they wrote:
We who have served as secretary of the Treasury in both Republican and Democratic administrations write in support of the proposed legislation to prohibit certain proprietary activities of commercial banking organizations—the so-called Volcker rule, as part of needed financial reform (“It’s Time for Financial Reform Plan C,” by Alan Blinder, op-ed, Feb. 16).
The principle can be simply stated. Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services.
Hedge funds, private-equity funds, and trading for speculative gains are activities carried out by thousands of nonbanking firms. These firms and funds are and should also be free to compete and to innovate. They should, like other private businesses, also be free to fail without explicit or implicit taxpayer support. Those few nonbank firms that present systemic risk should be subject to reasonable restrictions on capital, leverage and liquidity.
We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform. It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.
We urge the United States to take the lead in the forthcoming G-20 meeting and other appropriate forums to achieve broad agreement on this principle among the leading financial centers.
W. Michael Blumenthal
As we have noted in the past, this rule would not have prevented the current crisis; rather, it addresses new taxpayer risks created by the bailouts. Under the Volcker rule, the firms that engage in leveraged speculation should no longer expect Uncle Sam being there to backstop them.
Congress Should Implement the Volcker Rule for Banks
WSJ, FEBRUARY 21, 2010