Volcker Urges Dividing Investment, Commercial Banks
By Matthew Benjamin and Christine Harper
March 6, 2009
Commercial banks
should be separated from investment banks in order to avoid another
crisis like the U.S. is experiencing, according to former Federal
Reserve Chairman Paul Volcker.
“Maybe we ought to
have a kind of two-tier financial system,” Volcker, who heads President
Barack Obama’s Economic Recovery Advisory Board, said today at a
conference at New York University’s Stern School of Business.
Commercial banks
would provide customers with depository services and access to credit
and would be highly regulated, while securities firms would have the
freedom to take on more risk and practice trading, “relatively free of
regulation,” Volcker said.
Volcker’s remarks
indicated his preference for reinstating some of the divisions between
commercial and investment banks that were removed by Congress’s repeal
in 1999 of the Great Depression-era Glass-Steagall Act.
Volcker’s
proposals, included in a January report he wrote with the Group of 30,
would allow commercial banks to continue to do underwriting and provide
merger advice, activities traditionally associated with investment
banking, he said.
Still, Goldman
Sachs Group Inc. and Morgan Stanley, which converted to banks in
September, would have to exit some businesses if they were to remain as
commercial banks, he said.
‘Separation’
“What used to be
the traditional investment banks, Morgan Stanley, Goldman Sachs so
forth, which used to do some underwriting and mergers and acquisitions,
are dominated by other activities we would exclude -- very heavy
proprietary trading, hedge funds,” he said. “So there’s some separation
to be made.”
Jeanmarie McFadden, a spokeswoman for Morgan Stanley, declined to comment. A Goldman spokesman couldn’t be immediately reached.
Volcker also said
international regulations on financial firms are probably an inevitable
consequence of the industry’s current problems.
“In this world, I
don’t see how we can avoid international consistency” on securities
regulations going forward, he said. “The U.S. is no longer in a
position to dictate that the world does it according to the way we’ve
done it.”
Volcker’s comments
come as President Barack Obama seeks legislative proposals within weeks
for a regulatory overhaul of finance, especially companies deemed vital
to the stability of the financial system.
Glass-Steagall
The new regulatory
framework may stop short of reinstating Glass-Steagall, analysts say,
though banks may separate their business lines in order to avoid strong
regulatory scrutiny.
Volcker, who ran
the Fed from 1979 to 1987, said the financial industry’s problems stem
from larger issues. “I don’t think this is just a technical problem,
it’s a societal problem,” he said. He cited bankers on Wall Street
receiving multimillion-dollar bonuses for engineering failed mergers.
“There’s something wrong with the system,” Volcker said. “What are the incentives, what’s going on here?”
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