EU's Barnier expresses concern about Volcker rule

Thu Feb 9, 2012 7:28pm EST

* Barnier questions why rule only exempts U.S. govt debt

* Other countries have raised similar concerns

* Volcker says these concerns are overblown

By Dave Clarke

WASHINGTON, Feb 9 (Reuters) - Michel Barnier, the European commissioner in charge of financial regulation, wrote U.S. regulators earlier this week raising concerns about the impact that a ban on most proprietary trading by banks could have on financial markets outside the United States.

Barnier said that a proposed U.S. rule implementing the ban applies too broadly to foreign banks and markets and should instead focus only on trading activities that occur in the United States.

He raised the concern that the proposal would make trading markets less liquid, which can raise the costs of borrowing and increase market volatility.

He also complained that while the ban exempts trades involving U.S. Treasuries, it does not afford a similar treatment to debt issued by other governments.

"It is not clear to us why this exemption should be limited to trade in U.S. government bonds." he wrote to regulators in a letter dated Feb. 8. "All government bonds have similar features and functionalities."

Barnier's comments echo concerns raised by officials in other countries, including Bank of Canada Governor Mark Carney .

The proprietary trading ban is known as the Volcker rule, after former Federal Reserve Chairman Paul Volcker, who championed the idea.

It prohibits banks, which receive federal backstops like deposit insurance, from trading for their own profit in securities, derivatives and certain other financial instruments. It will also prohibit banks from having more than a minimal ownership interest in hedge funds or private equity funds.

It was included as part of the 2010 Dodd-Frank financial oversight law, enacted in response to the 2007-2009 financial crisis.

Volcker in an interview with Reuters last month dismissed the concerns raised by foreign regulators about how their debt is treated under the crackdown.

"I don't think it's an important issue," he said. "If we do it for the Canadians are we going to do it for the Greeks too, the Spanish, and, I don't know, Somalia or something? They've got banks. They don't have to rely on proprietary trading in the United States."

U.S. regulators in October released a proposed rule on how to implement the trading crackdown and comments are due Feb. 13.

Proponents of the rule contend banks that receive government backstops through deposit insurance or access to loans from the Federal Reserve should not be making risky trades that could put taxpayer money at risk.

The banking industry has hotly opposed the crackdown, arguing that it will freeze up trading markets because it will be too difficult to determine whether banks are making trades for their own profit or to create markets for their customers as is allowed under the Volcker rule.

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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