NEW YORK Paul Volcker, former economic adviser to President Barack Obama, has no patience for banks that claim it will be hard for regulators to rein in their speculative trading.
The rule that bears Volcker's name is meant to prevent banks from making big bets on markets with more money, known as "proprietary trades." The law aims to force banks to instead focus on trading with clients.
Many banks fear that their client trading activity will look to regulators like bet-taking, an argument that Volcker says is disingenuous.
"Bankers know when they're doing a proprietary trade, I assure you," Volcker told Reuters in an interview at his office in Manhattan on Wednesday. "If they don't know, they shouldn't be in the business."
How can regulators tell if a trade is speculative?
"If there are big unhedged positions constantly, then it's proprietary trading," Volcker said. An unhedged position involves a bank taking risk and not offloading it through other securities or derivatives.
Volcker was discussing the topic of proprietary trading at a time of intense debate and lobbying on Capitol Hill related to financial reform. U.S. regulators are now working to formulate the final versions of several large rules that were part of 2010's Dodd-Frank financial reform law, including the Volcker rule.
For his part, Volcker does not think it will be all that hard to identify proprietary trading. He suggested that big, unhedged market bets are easy to spot, as are patterns in a bank's trading book.
For instance, Volcker said, regulators should start asking questions if a bank has taken on big positions in certain markets or is holding assets for lengthy periods of time. The key questions, he said, are: "Why did they buy it and why are they holding onto it that long?"
"My position is that the rule ought to be enforced," said Volcker, adding that the language in the Dodd-Frank bill "is pretty strong."
A group of five U.S. regulators, including the Federal Reserve and the Securities and Exchange Commission, are in the process of writing separate versions of the provision, which are due to be released in July.
As regulators enter the final stage of the rule-writing process, the Volcker provision has become the subject of intense debate among regulators and vigorous lobbying from Wall Street banks including Goldman Sachs Group Inc and Morgan Stanley.
Volcker said he was concerned that the lobbying efforts might water down his eponymous law. He also said banks that find it hard to comply with proprietary trading restrictions probably should not be granted the protections and funding advantages of being part of the Federal Reserve system.
"Obviously, there's a lot of lobbying going on," said Volcker. "But if you want to be a bank, follow the bank rules. If Goldman Sachs and the others want to do proprietary trading, then they shouldn't be banks."
Volcker, who was chairman of the Federal Reserve from 1979 to 1987, served as a senior economic adviser to President Obama until earlier this year. He stepped down in February and does not work closely with the president any more, he said.
"If he wants my advice, he knows my number," said Volcker.
Volcker reiterated his view that the rule did not go as far as he would have liked because it still allows banks to invest 3 percent of Tier 1 capital in private equity and hedge funds.
Asked whether he was happy to have his name associated with the law that has sent shivers through Wall Street, Volcker chuckled.
"It's a funny thing to be asked," he said. "My grandchildren will be happy about it. It does give me an active interest in seeing that it is effectively implemented."
(Reporting by Lauren Tara LaCapra)