The Banks Are Now Allowed To Engage In Proprietary Trading (AKA Speculative Trading Activity — Yes, Seriously)

August 20, 2019: Statement by Martin J. Gruenberg Member, FDIC Board of Directors Link

The final rule before the FDIC Board today would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits. For that reason I will vote against this final rule

The Act in turn defines trading account as any account used for acquiring or taking positions in financial instruments “principally for the purpose of selling in the near term

The definition of trading account thus determines the scope of financial instruments subject to the Volcker Rule prohibition on proprietary trading The current rule implementing the Volcker Rule was adopted by the federal financial regulatory agencies in 2013.

The definition of trading account in the current rule encompasses all categories of financial instruments that are subject to fair value accounting regardless of how they are reported on bank financial statements because they may be freely traded.

The 2013 current rule recognized that proprietary trading occurs not only in financial instruments reported on the bank’s balance sheet as “trading assets and liabilities”, but in the accounts also denoted as available for sale (AFS), in equities held at fair value, and in derivatives not held for trading

The final rule before the FDIC Board today includes within the definition of trading account only one of these categories of fair valued financial instruments – those reported on the bank’s balance sheet as **** trading assets and liabilities***

the final rule would exclude about 46 percent – nearly half – of financial instruments from the Volcker Rule that are subject under the 2013 current rule and the 2018 NPR.

Available for sale securities and equities held at fair value, although not designated as trading assets for accounting purposes, are often bought and sold on a short-term basis for profit and the ability to do so is recognized in the accounting rules.   Similarly, derivative contracts designated as not held for trading can be managed so as to profit from short-term price movements and still comply with the accounting standards. By excluding these financial instruments from the Volcker Rule, the final rule before the Board today opens up vast new opportunity – hundreds of billions of dollars of financial instruments – at both the bank and bank holding company level, for speculative proprietary trading funded by the public safety net.

the Volcker Rule will no longer impose a meaningful constraint on speculative proprietary trading by banks and bank holding companies benefitting from the public safety net. For that reason I will vote against this final rule.

Mayra Rodriguez Valladares

the new Trading Account definition creates a presumption that financial instruments held more than 60 days are out of the scope for the Volcker Rule. My fear is that especially in such a low interest rate environment in the U.S. and negative rates in some countries, like Germany, banks will be incentivized to hold riskier instruments, such as below investment grade bonds or illiquid securitizations, for longer than 60 days”. Link

“As AFR has previously documented in our white paper on the Volcker Rule, even prior to these changes the Volcker Rule already contained dozens of exemptions and exclusions which facilitated bank trading activity, and bank trading revenues did not significantly decline after the Volcker Rule was implemented.

But in theory the coverage of the Volcker Rule was broad enough to permit regulators to act if they wished to do so. After today, they will no longer have that authority”. Carter Dougherty

Considering the Wall Street catch phrase, “I’ll be gone, you’ll be gone” — a way to almost jokingly refer to corporate executives collecting their bonuses, then leaving the mess for everybody in the future — we could be in for some fun little surprises similar to what was seen during the 2008 financial crisis; or the savings and loan crisis; or the Long Term Capital Management scandal; or the …well you get the drift. If you go by the historical timeline, we are certainly due for the typical Wall Street financial cataclysm seen every 7-10 years.

Just look the size of these massive corporations. When they go down, everybody else goes down.


What is even more surprising about this situation is that according to a statement by former SEC chair Mary Jo White, regulators are incapable of overseeing this speculative trading activity because they are severally underfunded.

“Our funding falls significantly short of the level we need to fulfill our mission to investors, companies, and the markets . . . [4,200 employees] are not nearly enough to stretch across a landscape that requires us to regulate more than 25,000 market participants, including broker-dealers, investment advisers, mutual funds and exchange-traded funds, municipal advisors, clearing agents, transfer agents, and 18 exchanges.” – Mary Jo White, SEC Chair in a speech at an agency conference (2014)

Just to give you an idea of the impact these rule changes will have on the stock market, let’s take a closer look at how big these banks actually are.  Truly, it is hard to wrap your head around, so it is best you visualize it.  As they say, a picture speaks 1000 words.  Click on the image for the interactive presentation 

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There is also far fewer banks today than there was in the past.  If you go all the way back to 1920, there was a total of 31 000 banks in operation at any one time, which translates into 3483 people per bank.  Today though, that total has deceased to only 4650 banks, equal to 70 000 people per bank.  


What is even more shocking is the fact that 39% of total bank assets are concentrated into only four companies.

The below chart shows the total interest income for all commercial banks in the United States.

In 2018, net interest income for all commercial banks in the United States was a whopping $500 billion.  Just to put that into perspective, this is almost equivalent to the entire U.S military budget — and remember, they spend more on than every other country combined!

 Let’s take a look at their financial statements for 2018.

Wells Fargo

Citigroup Inc [ formerly Travelers Group Inc ]

JP Morgan

That adds up to a total of $280 billion interest. This is just four companies out of the 22 million registered in the United States.

 So what is the takeaway?  Well, I guess all we can do at this point is pray that they know what they are doing this time.  They have AI now, so surely nothing can wrong — right?  Let’s hope!   

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