Wednesday, 29 September 2010

When Will They Ever Learn?

The banking industry is definitely in dire need of new and stringent regulations in order to prevent another recession from reoccurring. But are the new financial rules sufficient? Yes, Basel II has been upgraded to Basel III, but so what?

Rules certainly play a major role in the preservation of the banking industry’s integrity and goodwill. But, what actually plays an even more important role in ensuring that the set of new regulations will work are the “attitudes” of bankers.

If rotten apples are still prevalent in the industry, then I’ll ensure you, another recession is bound to happen. Greed-driven bankers, in one way or another, will find other ways to seek profit.

In the following news article, JP Morgan seeks to “shift” its proprietary trading desk out of its investment banking arm and into its asset management arm. I personally feel that “shifting” the prop trading desk is not going to make a drastic difference and is definitely not going to meet the requirements of the initial Volcker Rule “a ban on proprietary trading”.

Here’s another interesting read on the Volcker Rule’s “approved final version” from the New York Times.

“…the bill does not include the tough restrictions on derivatives trading championed by Senator Blanche L. Lincoln, Democrat of Arkansas, which would have forced banks to jettison their most lucrative dealings in this area.”

“…banks will be required to segregate their dealings only in the riskiest categories of derivatives, including the highly structured products like credit-default swaps based on bundles of mortgage loans, and in certain types of derivatives that are based on commodities that banks are already prohibited from investing in, like precious metals, agricultural products and energy.”

It appears that derivatives are still tradable. Only a certain few are banned. I believe that bankers will be smart enough to design and churn out more incomprehensible derivatives to fool innocent and non-investment savvy investors that would lead to another crisis in no time.

Time will tell whether another set of new regulations will be needed.

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