As the details emerge on the financial reform bill, it becomes apparent that it will do little to avert another financial crisis in the coming years. Huffpo notes the same regarding certain provisions of the Volcker Rule, intended to limit trading risks.
Specifically, there are varying implementation periods for the reduction in trading riskier asset classes. See Bloomberg article for details.
CNBC notes that the bill is likely to get weaker not stronger as delays mount and with the death of Senator Robert Byrd taking away a key support vote. The “bank tax”, may be eliminated to win Scott Brown’s support.
The bank tax could have been a small, but nice and clean way to penalize excessive risk taking. Instead it got muddled up with other provisions and now it is likely to be swept aside altogether. This is not that material in the scheme of things, but it would have been another nudge towards safety and soundness.
The biggest problem with the bill is that implementation delays and study periods followed by regulators discretion mean that the system will do little to strengthen itself even as global financial markets founder.
The Lincoln Derivatives amendment as now written allows the “bank” (deposit insured financial institution) to trade in interest rate swaps (like those sold the Greek government and Jefferson County). Foreign Exchange, Silver, Gold, hedging instruments, and investment grade Credit Default Swaps. That is a hole big enough to drive a truck through. Investment grade CDS become non investment grade in a crisis. I would like to see how regulators intend to monitor this.
Finally for today, the modified Merkley/Levin allows investments in Hedge and Private Equity Funds up to 3% of Tier 1 Capital. Given volatility, my guess is that this is a real 1% capital exposure at a minimum, and more if a liquidation cycle is triggered such as it was in 2008 with Lehman Brothers. So there should be other ways to increase bank capital or reduce the incentives for risk taking.