Some consideration abt it.... fm Nomura Intl (1st version)
"we are getting specialists to look into Volker rules's details... but I just set out some preliminary thinking... **************************
There are big questions to be asked
1. How likely is this to pass? Personally, I reckon some form of
this is likely to pass. I don't think that we should rely on a R.
filibuster to stop this. The risk is that enough Republican populists
will support this in order for it to pass (see point H below).
2. How much could this change?/when might it pass? It's possible
that this could change significantly and/or take some time (many mths?)
to get passed as it appears to be fairly rushed and lacks detail. (see
the foot of this page for comment on prop risk)
3. Who is likely to be impacted? I.e. it looks like this covers
commercial/depo taking banks. In this respect, it could leave GS, MS and
Nomura relatively unscathed
However, it will presumably require GS and MS to forgo their bank
charter & lose access to the Fed discount window - which will increase
their 'riskiness', and hence their funding cost*).
*That said, it's not clear that the authorities want them to relinquish
their bank charter bec it would reduce oversight. After all, it was a
pure Investment banks (Leh) that was an important source & symptom of
the last bust... so it's not clear how separation can help.
What are the implications/other thoughts?
A. (in the s-t evidently bad for risk (higher USD-EM), and bad for
the USD). However, beyond the s-t, would tend to think that the impact
on USD-Asia (and other EM) will be relatively limited - i.e. once the
'panic' subsides, it's relatively bad news for US economy and
B. This will contribute to wider swap spreads.
C. Indeed, the regulations on non deposit funding could be
particularly burdensome, depending on their severity, esp. given that
this would coincide with the Basel Committee on Banking Supervision's
proposals which have yet to be felt in the US but which will over time
increase bank funding costs, penalize traditional curve risk, encourage
a wave of asset allocation into govt bonds, blow-up bond swap spread,
D. The spirit of this seems to be a) (obviously) to reduce risk
taking, b) (possibly, although the (apparently sidelined) Geitner denied
this on BBG) reduce scale.
E. BoA, JPM and Citi may have to split their I.banks and their
F. In this respect, this can continue to be bad news for risk
G. It's also bad for the real economy, bec a) it wastes a lot of
management time dealing with this issue, b) it reduces the benefits from
revenues from the risk-taking, c) it reduces the benefits of scale. D)
disincentivizes innovation. & E) all in all, places a greater burden on
banks at a time when they are supposed to be lending more money.
H. It also has worrying implication for the direction of political
debate. That is, it looks like the D. response to the loss in Mass. is
to move towards populism (the ground that the left and right can agree
on) rather than a sensible (Clintonesque) middle.
I. This may be bad news for finance in particular, and may
represent a shift away from the center in terms of finance policy
129.html... indeed, many wire stories suggest Geitner (and Summers) have
been sidelined. This is not good news as Geitner seemed to be relatively
Additional on prop' risk:-
a. As for commercial banks, they might be able to carry on with
much of their existing business given that client focused risk taking
will still be allowed which requires banks to accumulate bucket risks
etc, and that the censure will fall upon pure prop trading, private
equity/ hedge fund investments.
For many commercial banks, these operations have been scaled back a lot
since they blew-up quite spectacularly. The problem would be if the prop
arms of banks which tend to be allied to their Treasury functions are
defined as prop rather than facilitators of funding. If so, they that
would be a far more consequential blow to the earning power of banks and
their ability to take risk and generate revenue.
In this regard (and assuming that the standards are allied globally),
Barcap vs. BofA could be an interesting contrast. Barcap's prop
functions and private equity business are relatively muted other than
the prop group allied to the core Treasury operation, while BofA/ ML has
a more sizable revalue stream from these sources due in part to legacy
ML. The question is, whether or not these prop businesses of banks like
ML are large enough to be spun out or if they would simply be closed
down and hence market liquidity would decline.
b. Re: prop trading in some of the major banks (i.e potential
impact) - from Business Week
- Goldman Sachs: At least 76 percent of 2009 revenue (around $34bn) from
trading and principal investments. About "10-ish percent" of the New
York-based firm's revenue comes from "walled-off proprietary business
that has nothing to do with clients," according to Chief Financial
Officer David Viniar.
- Morgan Stanley: Lost $1.05bn on principal investments in 2009, has
mostly shut down trading operations it deems "proprietary," Chief
Financial Officer Colm Kelleher said on a conference call this week.
- Citigroup: 2009 generated at least $3.93bn of revenue from principal
investments, or 5% of overall revenue, according to the bank's financial
- JPMorgan Chase: $9.8bn of revenue from principal investments in 2009,
or 9.8% of the firmwide total, according to its financial statements.
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