December 11, 2014
Will The Swaps Pushout Rule Die In The Cromnibus?
Posted by David Zaring

One dodgy thing that is being included in the currently debated spending bill is a substantive provision repealing a much-hated-by-banks law requiring them to do most of their derivatives trading though an entity that is not covered by deposit insurance.  It's a rule that sounds pretty logical - why subsidize derivatives trading with deposit insurance, and isn't it risky to do otherwise?  And why do we have to address this in a government budget bill anyway?

But it is also one of uncertain policy origins.  Blanche Lincoln thought the swaps pushout rule would resonate with voters when she pushed it, and maybe community banks, which don't do a ton of this stuff, would like to make life hard for the big banks that do.  Elizabeth Warren is incensed that it might  be repealed, so maybe her constituents would be for it.  But the Fed doesn't think it does bank safety much good.

Here's Dave Weigel on the politics, which look good for the banks (Warren's concerns aside, Democrats aren't whipping for the pushout rule reversal to be defeated).  Here's DealBook on the sausage-making (the statutory language was drafted by Citigroup, which has always seemed like the most tone-deaf bank to me, rather than the most politically puissant).

My view is that financial regulation, which is just about protecting banks from themselves/macroeconomic shocks, with a soupcon of rent-seeking, is a mixture of easy rules and hard ones.  Activity restrictions, like the Volcker Rule, or anti-branching laws, are easy.  Capital rules, at least the current ones, are hard, and require a team of examiners to look over the daily positions of the banks, and so on. Admati's capital rule recommendation - banks must hold 4 times more capital than they do now, and there will be no risk-weighting - is an effort to make that easy again.

And organizational rules - create a bank holding company, make this sub do this thing, and that sub do that thing - are also easy.

Note that currently, it's the left and community banks that like the easy rules, and it's the right and the big banks that prefer to do things the hard, sophisticated way.  That doesn't mean that complex rules are weak ones - I can't judge the onerousness of our tax laws, but some of them are super-complicated responses to super-sophisticated behavior, and maybe that makes more sense than giving up and charging everyone a VAT.  But that's the way I see financial regulation right now.

And yes, I don't know why part of Dodd-Frank should be repealed as a condition of passing a spending bill.  But I admire the ability of the lobbyists to get in there and at it.

One last thing - it's risky to be the bank named as the drafter of a bill taking away some of your regulator's regulatory powers.  We'll have to see if Citi starts paying a extra-large number of fines in the next year, or if it really did do this with the tacit approval of its supervisors.

Administrative Law, Finance, Financial Crisis, Financial Institutions | Bookmark

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