Banks Will Always Suck At Trading, Badly Need A Volcker-Like Rule: Study
A new study by economists Arnoud Boot at the University of Amsterdam and Lev Ratnovski at the International Monetary Fund finds that recent blow-ups in the banking sector — JPMorgan Chase’s $6.8 billion “London Whale” losses and that whole financial-crisis thingy, to name two — are not isolated events, but “a sign of deeper structural problems in the financial system.”
The only prescription? Less trading by big dumb banks.
“Without policy action, crises associated with trading by banks are bound to recur,” Boot and Ratnovski write in a blog post about the paper. “Even strong supervision will not be able to prevent them. Consequently, it appears necessary to restrict trading by banks.”
If you read the fuller article, and I recommend you do, you will find that banks have incentives to do what is essentially speculative trading. Right now with interest rates low, there is a terrible temptation to take their money and gamble with it since there is little profit in traditional investments. And, of course, why do legitimate investments in business, industry and homes, when you can make so much more money speculating?
The banks have to be regulated to perform their traditional functions of lending to build a strong economy. We protect banks from collapse and insure their deposits with taxpayer money because when they loan money that develops the economy and creates opportunities. What we are getting now is a lot less useful investing and a lot more gambling at the public’s expense.