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ON THE MONITOR

A Ban on Banks Could Be Boon for Other Traders

February 8, 2010
Alexa Jaworski

If banks are banned from running their own proprietary trading desks, that will neither dampen trading activity nor its profitability.

It will simply move elsewhere, trading firms contacted by Securities Industry News say.

In a speech January 21, President Obama proposed a new law which will no longer allow banks to own, invest, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.

Dubbed the “Volcker Rule,” after its chief supporter, ex-Federal Reserve Chairman Paul Volcker and current chairman of the President’s Economic Recovery Advisory Board, the proposed ban will curb the “kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong,” according to the President.

“Regardless of how the sell side feels about this, we could be at the cusp of the biggest business model change for banks since Glass Steagall,” said Lloyd Altman, a senior executive in Accenture’s Capital Markets Industry division. The Glass Steagall Act, also known as the Banking Act of 1933, established the Federal Deposit Insurance Corporation (FDIC) in the United States. Passed in the wake of the 1929 stock market crash, the act introduced banking reforms, including prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities.

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