US banks join foreign governments against Volcker rule

NEW YORK | It has been one of the main topics at Davos, according to The New York Times: A number of foreign officials complaining to Treasury Secretary Timothy Geithner about the Volcker rule. It hasn’t come from the usual suspects, American banks, but from other governments. European, Japanese and Canadian officials have objected to one aspect of this already polemic new regulation: the fact that it restricts US banks on trading with foreign government bonds. A way to avoid another MF Global. A way to avoid another big investment firm collapsing after buying risky European bonds.

The Volker rule says that banks are not allowed to participate in “proprietary trading” –deposit-taking banks trading with their own money. The goal is to eliminate risky bets made by big banks. So far, so good: that’s the way to avoid the too-big-too-fail thingy.

Big banks didn’t like it, of course, and they are lobbying in Washington to water it down. The problem comes when, in order to avoid those risky bets, the rule also establishes that United States banks would be restricted in trading foreign government bonds. That, foreign governments think, would increase borrowing cost and create liquidity problem in a market –government bonds– already suffering.

Not only that aspect worries foreign officials. The rule has something of a protectionist touch: it provides an exemption for United States government securities.

“I am concerned that the regulations could have a significant adverse impact on sovereign debt markets, including here in the U.K.,” Britain’s Chancellor of the Exchequer George Osborne wrote in a letter to Federal Reserve Chairman Ben Bernanke.

“U.S. banking regulators are exploring whether they can exempt sovereign debt from the Dodd-Frank [Act, the new financial system regulation created after the financial crisis, where the Volcker rule lives] ban on proprietary trading after foreign governments complained that the rule could raise borrowing costs and impede the flow of capital,” a person familiar with the talks said to Bloomberg.

The rule has to be in place by July 21. Now it is open for public comments. Pretty sure the five regulatory agencies involved will be getting a lot of them.