Fed's Raskin: No government backstop for banks that do prop trading

WASHINGTON Mon Jul 23, 2012 7:03pm EDT

Federal Reserve Board Governor Sarah Bloom Raskin delivers a speech entitled ''Mortgage Servicing Issues'' before the National Consumer Law Center conference in Boston, Massachusetts November 12, 2010. REUTERS/Brian Snyder

Federal Reserve Board Governor Sarah Bloom Raskin delivers a speech entitled ''Mortgage Servicing Issues'' before the National Consumer Law Center conference in Boston, Massachusetts November 12, 2010.

Credit: Reuters/Brian Snyder

WASHINGTON (Reuters) - Banks that trade for their own accounts should not benefit from the implicit backing of taxpayers, and Wall Street's opposition to new rules curbing such activities is unfounded, a top Federal Reserve official said on Monday.

Federal Reserve Governor Sarah Raskin, a former Maryland financial regulator, said the notion that derivatives markets enhance firms' ability to raise capital was questionable.

"I view proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop," Raskin told students at the Graduate School of Banking at Colorado in remarks made available in Washington.

"Much of this so-called liquidity, especially in opaque over-the-counter markets, is potentially illusory and destabilizing, especially during adverse market conditions, which does not benefit the public."

The so-called Volcker Rule, named after former Fed Chairman Paul Volcker, limits the ability of banks to make speculative bets with their own funds. But regulators are expected to craft some exemptions to the measure, which is one component of the broader Dodd-Frank financial reform package.

Raskin, who dissented against a draft of the rule last year, said she did so because the regulatory measures were not sufficiently stringent and left open too many loopholes.

"I was concerned that the (measures) as crafted could be subject to significant abuse - abuse that would be very hard for even the best supervisors to catch," she said.

"Liquidity is not an inherent public benefit that justifies the expenditure of significant compliance, oversight, examination and enforcement costs."

(Reporting by Pedro DaCosta; Editing by Jan Paschal)

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Comments (3)
foiegras wrote:
Another voice crying in the wilderness…Brooksley Born…Sheila Bair…LTCM…Lehman…AIG…JPM…the next cataclysm?

Jul 23, 2012 8:02pm EDT  --  Report as abuse
mutt3003 wrote:
All the banksters have to say is “it provides liquidity to the market” and they are allowed to do as they please. Granted it helps to bribe the right money-whoring politicians. Real liquidity would be to demand high levels of capital reserves not a piece of paper that covers a bet that covers a promissory that covers a CDS that covers ………..
Things like naked short selling cannot possibly be adding to liquidity. End it. Speculation does not add to liquidity, especially when up to 1000 times the actual physical supply of the commodity is being sold. Buy it and be required to take physical ownership. The list goes on and on and the only people that are being helped by all of the so called liquidity are the banksters and not the retirement investors.

Jul 23, 2012 8:12pm EDT  --  Report as abuse
neahkahnie wrote:
I would hope that Congress agrees with this. If not, the people will get their pitchforks and call on Pat Buchanan to lead the torches.

Jul 23, 2012 12:01am EDT  --  Report as abuse
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