Former U.S. Federal Reserve chairman Paul Volcker, who lent his name to historic restrictions on banks' financial market trading, says regulators should not back down in imposing the curbs and that additional reforms to markets are necessary.
"There is a group of banks that don't like it. They would like to have some freer action to do what they want to do as in the past — you get some opposition to it," Volcker told reporters at a financial markets conference in Abu Dhabi on Wednesday.
"They shouldn't be fighting the concept of the rule. The rule against speculative trading is practically doable."
The "Volcker Rule" is a section of the U.S. Dodd-Frank financial oversight law which bans banks from trading for profit with their own funds. It is due to take effect in July; Volcker championed the idea but did not write the legislation, which was authored by senators.
The law exempts trade in U.S. Treasuries and some other U.S. state and local debt from the ban, but it does not exempt other countries' sovereign debt, leading to fears that it could destabilize markets. Finance officials from the Group of 20 nations pressed Washington last weekend to relax that aspect of the ban.
Volcker said these and other concerns about the law should be examined and modified where necessary.
"There is a real concern about unintended consequences that some foreign banks and governments have seen in the technical application of the rule to the operation of non-American banks. (This) is raising some angst," he said.
"I'm not an expert on the details of the rule, but that is an area that obviously has to be looked at."
He added, "It is a 35-page regulation, it is a complicated regulation and undoubtedly there will be some changes made in the technicalities -- it should happen."
But Volcker made clear that any changes should not permit dangerous speculation in the markets.
"We have to protect against excesses of liquidity. Too much liquidity can be dangerous. Something like alcohol," he said.
"The rationale is clear. Government support and the expectation of government support should not be extended to activities that are speculative in nature."
In his keynote address to the conference, Volcker also called for further reforms, including the creation of a single body to protect the U.S. banking system against the failure of large financial institutions.
"We need a single authority dealing with the potential failure of a big financial (institution) without government financial support. This comes under the general terms of a resolution authority...A more efficient approach towards potential bankruptcy for large financial institutions."
He said there was a need for greater control by regulators over credit rating agencies, which were blamed for failing to warn of risks at the start of the global financial crisis, and over the global market for financial derivatives.
"All this requires international coordination and cooperation," he said.
"The whole derivatives thing is very important — it gets a lot of attention. But that is strongly resisted by banks, the standardization of derivatives."
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