Former Federal Reserve Chairman Paul Volcker told a Senate
Banking subcommittee on May 9 that the contentious rule restricting
investment banks from proprietary trading, which bears his name, is
intended "to assure maintenance of a flow of credit to businesses
and individuals and to provide a stable, efficient payment system
and safe depository."
In response to criticism that the Volcker Rule will interfere
with routine market-making, Volcker dismissed such concerns as
"nonsense," following that clear enough distinctions exist between
the two practices through indicators, such as the size of a trade
relative to the position, volatility and value-at-risk of a trade. He insisted the rule will be enforceable and should have no
obstruction to market-making.
Senators also raised questions about the potential constraint on
market liquidity under the Volcker Rule, which regulators are now
scrambling to finalize before the July 21, 2012 deadline.
Volcker called it a mistake to assume highly liquid markets are
always in the public interest, citing the recent housing bubble
crash fueled by high demand for below-standard mortgage securities.
"If the markets are too liquid, it can give rise to behavior that
is not very useful in terms of the basic fitness of banking or
finance markets," he said.
Offers support for MMFs
In his written testimony, Volcker extended his support for
structural change within the financial system to the solvency of
money-market mutual funds, or MMFs. He referred to MMFs as "truly
hidden in the shadows of banking markets" due to their
demand-depository function without bank-like capital requirements,
insurance protection, nor regulatory surveillance.
With that, Volcker endorsed calls to remove money-market funds
from their current stable $1 net asset value (NAV) and allow the
NAV to float, a proposal soon expected to be unveiled by the U.S.
Securities and Exchange Commission. "They should be treated as
ordinary mutual funds, with redemption value reflecting day by day
market price fluctuations," Volcker noted in his submitted
AFP opposes a floating NAV and recently sent a letter to
Congress addressing its concerns over this matter.