Accounting Should Guide Volcker Rule On What Counts As A Hedge
Professor Michael Klausner spoke with Francine McKenna of the American Banker to respond to the proposed Volcker Rule that would provide regulation over banks that engage in proprietary trading.
Accounting standards allowed Jamie Dimon to offset seemingly sudden, multibillion-dollar mark-to-market declines (on trades which were supposedly designed to mitigate losses) with unrealized gains on the sale of $1 billion of unrelated assets. Unfortunately, the proposed Volcker Rule ignores accounting standards for derivatives and hedges when judging what constitutes bank proprietary trading.
Dodd-Frank's Volcker Rule restricts a Fed-supervised bank from engaging in proprietary trading. To receive an exemption for "permitted risk-mitigating hedging" activities, a bank would have to meet seven criteria – all seven, not just one – under the implementation rules proposed by the OCC, the Federal Reserve Board, SEC, and the FDIC.
Michael Klausner, a professor of business and law at Stanford University, says a principles-based approach may work better to regulate these activities.
"Whether we are talking about accounting rules or something else, the effort to implement the concepts underlying the Volcker Rule will inevitably be imperfect," he told me. "The activities it addresses are inherently complex and poorly suited to precise rules."