Friday, 13 March 2009

Perspex* Steagall?

Paul Volcker suggests that:
the US could perhaps do with a new version of Glass-Steagall, this time splitting hedge funds, private equity funds and proprietary trading off from Wall Street banks.
How would you enforce it, though? You can't force them to take no risk, not least because banks cannot precisely maturity and FX match their funding, and so banks are net long liquidity which they need to invest. So you would have to have a de minimis risk limit. But how would it be expressed to prevent gaming? Remember that one of the reasons we got into this mess in the first place was that AAA subprime tranches looked very low risk in VAR models. Still, the idea merits discussion.

*No disrespect intended to Senator Carter Glass.

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