Large Banks and the Volcker Rule

Richardson, Matthew; Smith, Roy C.; Walter, Ingo; Acharya, Viral V.; Cooley, Thomas F.

doi:10.1002/9781118258231.ch7

Cited by 17 publications

(8 citation statements)

References 22 publications

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“…6 Publicly listed firms sometimes use restricted stock to create some fixity in the ownership structure, and continued loyalty of key personnel. Richardson, Smith, and Walter (2010): "Indeed, the recent studies mirror the findings […] some 15 years earlier […] there was no predominance of evidence either for or against economies of scale in the financial sector." This precedes the fintech revolution, so it is not clear whether this remains true.…”

Section: Scale and Scope Economies In Bankingmentioning

confidence: 61%

Understanding the Future of Banking Scale and Scope Economies, and Fintech

Boot

2016

World Scientific Studies in International Economics

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banks strengthened the link between markets and financial institutions. The latter runs for example via securitization and other forms of asset sales that remove assets from a bank's balance sheet allowing those assets to become tradeable. This could amplify the impact of financial market conditions on banks (Shin, 2009). Apart from providing all kinds of benefits (e.g., diversification, liquidity), a more negative view is that the enhanced opportunities to trade assets invites 'excessive changeability' and possibly more opportunistic behavior in banks that could undermine their stability (Boot, 2014). The linkages to the financial market facilitate a proliferation of transactionoriented banking (trading and financial market) activities possibly at the expense of more traditional relationship banking activities. In this context also the ownership structure of banks is important. The traditional partnership model in investment banking may have contained opportunistic behavior in that partners had their personal wealth tied up in the business, and could not easily leave and liquefy their ownership claim. In a sense, the marketability of their own involvement (human capital) was severely constrained which may have countered the fluidity of banking activities itself. Also here information technology and the deepening of financial markets may have been instrumental in creating a more fluid ownership structure based on a stock market listing. We will discuss these developments, and subsequently addresswhat The Economist has called-the fintech revolution. 1 Can we draw insights from the extensive literature on scale and scope economies in banking? We will argue that only limited insights are available. Most recent empirical work identifies some scale economies, yet faces bigger difficulties in identifying real scope advantages. And what is particularly missing in the literature, is the impact that information technology may have on the industry. 'Fintech considerations' have not been part of this literature. The organization of the paper is as follows. In Section 2 we focus on the impact of information technology and the deepening of financial markets on the transaction-versus relationship-orientation of banks. Section 3 discusses ownership structure issues. Scale and scope 36xy

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Section: Scale and Scope Economies In Bankingmentioning

confidence: 61%

Understanding the Future of Banking Scale and Scope Economies, and Fintech

Boot

2016

World Scientific Studies in International Economics

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“…Second, while banks use risk management constraints, we do not know the exact models that they utilize for portfolio selection. The size of trading losses in the crisis suggests that banks have incentives to take substantive tail risk; see Lucas (2001), Hull (2007, p. 198), and Richardson et al (2011). For example, generous deposit insurance and compensation schemes might provide such incentives; see Cai et al (2010), Barth et al (2012, Ch. 3), Kane (2012), andVolcker (2012).…”

Section: Methodsmentioning

confidence: 99%

“…The size of trading losses in the crisis suggests that banks have incentives to take substantive tail risk; see Lucas (), Hull (, p. 198), and Richardson et al. (). For example, generous deposit insurance and compensation schemes might provide such incentives; see Cai et al.…”

Section: The Modelmentioning

confidence: 99%

“…Several authors argue that the scope of the Volcker Rule should be enlarged. Based on an examination of the costs (e.g., systemic risk) and benefits (e.g., infrastructure synergies) of proprietary trading, Richardson et al (2011) point out that it is reasonable to reinstate a Glass-Steagall Act-type restriction on such trading. 10 Furthermore, noting the emergence of systemic risk arising from the substantive holdings of asset-backed securities by large banks, they propose an expansion of the Volcker Rule that extends the definition of proprietary trading to such holdings.…”

Section: Introductionmentioning

confidence: 99%

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On Regulatory Responses to the Recent Crisis: An Assessment of the Basel Market Risk Framework and the Volcker Rule

Alexander¹,

Baptista

Yan

2015

Financial Market

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Banks around the world suffered huge trading losses in the recent crisis. In response, the Basel Committee on Banking Supervision () provides a revised framework to determine the minimum capital requirements for their trading portfolios. Moreover, the Dodd‐Frank Wall Street Reform and Consumer Protection Act () imposes certain restrictions on the composition of the trading portfolios of U.S. banks through the ‘Volcker Rule.’ Our paper assesses the effectiveness of the Basel framework and the Volcker Rule in preventing banks from taking substantive tail risk in their trading portfolios without capital requirement penalties. We find that the Basel framework is ineffective in preventing banks from doing so, but that the Volcker Rule is beneficial in that it partially mitigates this ineffectiveness. We also suggest two alternatives to the Basel framework and discuss the impact of the Volcker Rule if either one of them is adopted.

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“…236 In addition, expansionary strategies of the banking institution to multifunctional banking model has been found to increase the systematic risk too. 237 The only conclusion that may be derived from the above discussion is that although it is believed that in the absence of "any strong evidence in favor of conglomeration, structural reform is a good way to respond to interconnectedness in financial markets", 238 as the evidence is not clear that imposing structural reforms can contribute to financial stability, adequate care must be taken in introducing such measures, in particular at the EU level.…”

Section: Impact On Banking Business Models and Banking Stabilitymentioning

confidence: 99%

Can the Plight of the European Banking Structural Reforms Be a Blessing in Disguise?

Nabilou

2019

SSRN Journal

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One of the problems perceived to be at the heart of the global financial crisis was an amalgamation of various commercial and investment banking activities under one entity, as well as the interconnectedness of the banking entities with other financial institutions, investment funds, and the shadow banking system. This paper focuses on various measures that aim to structurally separate the banking entities and their core functions from riskier financial activities such as (proprietary) trading or investments in alternative investment funds. Although banking structural reforms in the EU, UK, and the US have taken different forms, their common denominator is the separation of core banking functions from certain trading or securities market activities. Having reviewed the arguments for and against banking structural reforms and their varieties in major jurisdictions, including the EU, UK, US, France, and Germany, the paper argues that a more nuanced approach to introducing such measures at the EU level is warranted. Given the different market structures across the Atlantic and the lack of conclusive evidence on the beneficial impact of banking structural reforms, the paper concludes that the withdrawal of the banking structural reforms proposal by the European Commission has been a prudent move. It seems that in the absence of concrete evidence, experimenting with structural reforms at the Member-State level would be less costly and would provide for opportunities for learning from smaller mistakes that could pave the way for a more optimal approach to introducing banking structural reforms at the European level in the future.The literature on financial regulation includes various measures for addressing the risks of financial institutions. From among these measures, three overarching approaches to reducing the externalities emanating from the financial institutions stand out. The first set of these measures include price-based regulations such as emission taxes in environmental regulation and capital or liquidity requirements in banking regulation. These regulations are normally introduced in tandem with enhanced and effective supervisory and resolution mechanisms. Such measures can also be combined with the structural limits on the size and scope of the activities of financial institutions. 15 Price-based regulations for addressing systemic risk may include the enhanced regulatory framework in the form of higher quantity and quality of lossabsorbing capital and stricter liquidity standards. 16 Second, quantity-based regulation such as emission quotas in environmental regulation. 17 In the banking industry, concentration limits, the regulations encouraging the allocation of certain ratios of loans to underprivileged segments of the society or regulations requiring gender balance on boards oftentimes take this form. Third, structural regulations are often imposed on the size, structure or scope of activities of financial institutions. 18 Its scope includes separating and moving risky and complex businesses to stan...

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Large Banks and the Volcker Rule

Cited by 17 publications

References 22 publications

Understanding the Future of Banking Scale and Scope Economies, and Fintech

Understanding the Future of Banking Scale and Scope Economies, and Fintech

On Regulatory Responses to the Recent Crisis: An Assessment of the Basel Market Risk Framework and the Volcker Rule

Can the Plight of the European Banking Structural Reforms Be a Blessing in Disguise?

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