WASHINGTON (Reuters) - Banks that trade for their own accounts should not benefit from the implicit backing of taxpayers, and Wall Street’s opposition to new rules curbing such activities is unfounded, a top Federal Reserve official said on Monday.
Federal Reserve Governor Sarah Raskin, a former Maryland financial regulator, said the notion that derivatives markets enhance firms’ ability to raise capital was questionable.
“I view proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop,” Raskin told students at the Graduate School of Banking at Colorado in remarks made available in Washington.
“Much of this so-called liquidity, especially in opaque over-the-counter markets, is potentially illusory and destabilizing, especially during adverse market conditions, which does not benefit the public.”
The so-called Volcker Rule, named after former Fed Chairman Paul Volcker, limits the ability of banks to make speculative bets with their own funds. But regulators are expected to craft some exemptions to the measure, which is one component of the broader Dodd-Frank financial reform package.
Raskin, who dissented against a draft of the rule last year, said she did so because the regulatory measures were not sufficiently stringent and left open too many loopholes.
“I was concerned that the (measures) as crafted could be subject to significant abuse - abuse that would be very hard for even the best supervisors to catch,” she said.
“Liquidity is not an inherent public benefit that justifies the expenditure of significant compliance, oversight, examination and enforcement costs.”
Reporting by Pedro DaCosta; Editing by Jan Paschal