Commercial banks will come to resemble hedge funds over time unless new rules are introduced setting limits on proprietary trading, White House economic adviser Paul Volcker said on Saturday.
In a speech at the Bellevue presidential palace in Berlin, Volcker made the case for proposals being pushed by the administration of President Barack Obama that would lead to a clamp down on risky bank activities.
The proposals have been dubbed the Volcker rule after the former Federal Reserve chairman.
Without any limitation on proprietary activity by commercial banks, they will, indeed, over time come to take on the characteristics of hedge funds, Volcker said in the text of a speech provided to Reuters before delivery.
And then, I ask, could we expect the same attention to the more essential services?
Volcker said that allowing banks to take customer deposits and at the same time engage in risky trading served neither the public's interest in maintaining key services nor the need for a self-reliant, failsafe financial system.
He also urged steps to corral excesses in derivatives markets, including the use of credit default swaps (CDS).
Surely the recent revelations about the use (and abuse) of complex derivatives in obscuring the extent of Greek financial obligations reinforces the need for greater transparency and less complexity, Volcker said in the speech text.
Responding to Volcker's comments, European Central Bank President Jean-Claude Trichet expressed skepticism about the idea of limiting risky trading activities to hedge funds and other institutions that are unregulated.
If we push all these activities from regulated institutions to non-regulated, don't we take the risk of having a system that could be even more unstable? he said during a panel discussion.
(Writing by Noah Barkin; Editing by Kevin Liffey)