Wall Street Gets A Win With Volcker Rule Revamp

making speculative investments. It's called Vocer two point no. Joining me as Robert Hockety, professor at Cornell Law School, Bob tell us about the biggest changes that were approved with this new rule, I do, yeah. This is the principle change. I think, the one that this most movie most welcome on the front of the banks is a change in the presumption that was part of the Vocal rule before.

So previously, the presumptions that you were if you were engaging in short term trading, it was probably speculative other than hedging, and it was up to you to rebut that presumption, so basically to prove that you are innocent, so to speak, or that you were merely hedging in other words, rather than speculating. Uh, that presumption will go by the wayside now, and I think that that's probably going to elicit the greatest sort of sigh of relief on the part of the banks. How much of a

victory is this for the banks? It's it's easy to overstate the degree of the victory, but but it's to some extent going to determine. I mean, it's going to sort of depend on what what what. The actual cause of the sort of cutback and proprietary trading over the last few years has been right, so as you know, the proprietary trading books of the larger banks are much

smaller than they were before Vulker went into effect. But there's some sort of uncertainty I guess we would say as to whether the Volcan the rule itself was a reason for that, or whether there are other reasons that sound more in sort of changes in the industry. If it's the latter than the change in Vulcar isn't going

to make much difference. If, on the other hand, the Vulcar rule itself was an important part of that story, well, then of course it could bring about an up search in proprietary trading of a kind that was quite common of course, before one Democratic fd i C board member warned that the rollback could again endanger the financial system by allowing lenders to recklessly trade hundreds of billions of dollars in risky assets as they did before the financial crisis.

Do you agree with that? Well, I understand where Mr Grinberg's coming from on that, But again, whether he's right or not sort of depends again on what the cause of the decline and proprietary trading since has been. If, again that was owing to the vocal rule itself, that he could very well be right. If, on the other hand, there have just been changes in the industry that makes proprietary proprietary trading less attractive than it used to be, then it might very well be that his alarm it's

not quite as justified. Does the new rule give lenders a better picture of what trades are prohibited? I think it resolves a certain kind of uncertainty on their part, right, I think. And it's not so much an uncertainty as to whether you know their trades a proprietary or not, because they would actually whether the trades are specultive or not, because ultimately they know that. But what it doesn't do is.

I think it resolved some uncertainty that they would be experiencing as to whether the regulators would be likely to find that to be the case or not. And in that sense it does resolve in uncertainty that's probably helpful to them. And what about compliance costs, Well, this ease some of the compliance costs. It should make compliance a little bit less costly because you're not as concerned with proving what your motives were engaging in the particular trades

that you were engaging. And in other words, the fact that the presumption of guilt, so to speak, is being removed itself makes it easier to comply because you don't have to do as much proving as you would otherwise have had to do. And um, do you anticipate that there might there will be more increased investments for the banks.

I'm a little kept to cool about that, June, but because I really don't think that the degree of additional liquidity that comes through proprietary trading of the science of the banks do really makes that much difference to the actual investing that they do. It makes a difference to the trading that they do. The trading is the secondary market activity of course, and investing is a somewhat different

sort of operations. And I'm actually skeptical that the sort of additional degree of liquidity that might be provided by the additional degree of trading that might be engaged in is going to make any serious difference to the amount of investing. And I think the amount of investing ultimately rides on what the prospects of adding value to the primary economy are, and you know, that's really a matter

of the real economy rather than the financial economy. So then you think that it's sort of the complaints about this from some regulators are are overblown. I think they probably are overblown. Um, I think the complaints about the rule being in existence at all were very much overblown. But I also think that the complaints about easing up on the rule are overblown. Basically, this is a so called This is a form of so called smart regulation that tends to be sort of too clever by half.

I think those who sort of propound things like this rather than more kind of bright line rules like the Glass Equal Act used to have in place. Um, you know, the claims on behalf of rules like this are always overblown. But at the same time, I think the complaints about them tend to be overblown as well. So I think in many ways it's sort of a tempest in a teapot.

I mean, I know, a lot of money is at stake, a lot of profiting is at stake, But when it comes to actual you know, productive activity in the real economy, I don't think any of this makes that much difference one way or the other. Well, I suppose the Trump administration has been has been focused on this, or at least the regulators have. There are some other Wall Street

rules that are awaiting revision, so to speak. Let's talk that those a little bit sure sure, So you know, one one another kind of top of the lister, you might say, has to do with the stress test of banks, you know, under the bed stress test reagime. That was another one of the sort of hallmarks of the post crash reforms during the early Obama years. And you know, there's been a lot of discussion about whether the banks should be sort of given more guidance in advance as

to what actually is going to be tested for. Right, those who think it's a good idea to allow for that, say, again, just like they say in connection with Bulker now that they would afford more certainty of the banks, the banks would have less uncertainty, and compliance would be easier. On the other hands, the counter argument is that you know, they you know the old bit about people teaching to

the test. You know, if people know in advance what sorts of questions are going to be on the test, and they can kind of gain the systems that were to make sure that they pass UM And so it might well be that the fundamentals are not as sound as they look when banks passed their stress tests if it's possible for them basically to kind of again gain the system once they know what the questions are going

to be. So UM, we look to be likely to see some significant changes on the stress in the stress testing machine very soon, and I actually think that could be potentially more momentous than the changes in Bulker. Really, well, that'll be intervidual talk about it again then, I'm sure, Bob. Thanks so much. That's Robert Hockin of Cornell Law School. Thanks for listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple Podcasts, SoundCloud,

and on Bloomberg dot com. Slash podcast I'm June Brosso. This is Bloomberg yea