In the Decade Since Enactment of the Volcker Rule, Just How Effective Has It Been? (AI Translation)
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文｜财新周刊 岳跃
By Caixin Weekly's Yue Yue
在2008年之前的几十年里，美国主要的投资银行，如雷曼兄弟、高盛、贝尔斯登、摩根士丹利等，亦存在自营与资管业务的利益冲突和潜在风险问题，后来这被认为也是导致2008年金融危机的重要原因之一。
For several decades prior to 2008, major American investment banks such as Lehman Brothers, Goldman Sachs, Bear Stearns, and Morgan Stanley experienced conflicts of interest and potential risk issues between proprietary trading and asset management operations. These issues were later considered to be significant contributing factors to the 2008 financial crisis.
当时这些投行的自营部门大规模投资于抵押贷款支持证券（MBS）、信用违约掉期（CDS），通过高杠杆和高风险的交易获利颇丰，有的杠杆甚至高达30倍、40倍；也不乏利用客户信息为自营交易获利的情况。而美国的金融监管当局当时并没有充分意识到这些风险。
At that time, these investment banks' proprietary trading desks made substantial investments in mortgage-backed securities (MBS) and credit default swaps (CDS), reaping significant profits through highly leveraged and high-risk trades, with some leverage ratios reaching as high as 30 or even 40 to 1. There were also instances where customer information was used to benefit proprietary trades. However, U.S. financial regulators at the time did not fully recognize these risks.
同时，一度不受传统监管约束的对冲基金、私募股权基金等，在2008年之前野蛮扩张。不少银行通过这些类似影子银行的渠道扩大风险敞口，但风险同样并未被完全监管和披露。
At the same time, hedge funds and private equity funds, which once operated beyond the bounds of traditional regulation, expanded aggressively before 2008. Many banks used these shadow banking-like channels to increase their risk exposure, but these risks were also not fully regulated or disclosed.
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- Major American investment banks engaged in high-risk proprietary trading activities which contributed to the 2008 financial crisis.
- The Dodd-Frank Act, specifically the Volcker Rule, aimed to prohibit proprietary trading by banking entities and impose stricter regulations.
- Despite the rule, criticisms and amendments continue as banks seek exemptions, with debates on its effectiveness in preventing systemic risks.
For several decades prior to 2008, major American investment banks like Lehman Brothers, Goldman Sachs, Bear Stearns, and Morgan Stanley faced conflicts of interest and potential risk issues between proprietary trading and asset management. These issues significantly contributed to the 2008 financial crisis. Investment banks made substantial investments in mortgage-backed securities (MBS) and credit default swaps (CDS), leveraging trades up to ratios as high as 40 to 1. There were instances where customer information was used to benefit proprietary trades, but these risks were not fully recognized by U.S. financial regulators [para. 1][para. 2][para. 3].
Hedge funds and private equity funds expanded aggressively before 2008, using channels that increased risk exposure but were not fully regulated [para. 4]. During the crisis, proprietary trading desks' assets depreciated rapidly, causing a liquidity crunch and affecting global markets, leading to further investor distrust in financial institutions [para. 5].
Post-crisis, U.S. regulators passed the Dodd-Frank Act in July 2010, aiming to reshape the financial regulatory framework. The act established the Financial Stability Oversight Council (FSOC) and included stricter oversight and capital requirements for key financial institutions [para. 6]. Section 619 of the act, known as the "Volcker Rule," proposed by former Federal Reserve Chairman Paul Volcker, aimed to reduce cross-sector risks by prohibiting proprietary trading and restricting investments in hedge funds or private equity funds by banking entities insured by the FDIC or classified as bank holding companies [para. 7][para. 8][para. 9].
The rule only allows certain activities like underwriting and market-making in securities issuance and necessary risk-mitigating hedging, with investments in related funds capped at 3% of the bank’s Tier 1 capital [para. 10][para. 11]. Exceptions exist for proprietary trading in government bonds, market-making aimed at liquidity provision, and hedging transactions aligned with held assets [para. 12][para. 13].
Proprietary trading was a significant profit source for Wall Street banks. For instance, in 2007, Goldman Sachs' trading and investment segment contributed $31 billion, about 67% of its total revenue. Proprietary trading alone was estimated to account for at least 10% of its annual income. Similarly, Morgan Stanley's institutional securities division comprised 55% of its 2007 revenue, with proprietary trading contributing significantly [para. 14][para. 15][para. 16].
The Volcker Rule faced strong opposition from Wall Street banks, leading to lobbying efforts to secure more exemptions [para. 17]. Events like the "London Whale" incident at JPMorgan Chase in 2012 highlighted the risks of proprietary trading disguised as hedging. The Volcker Rule took effect in April 2014, with full compliance required by July 2015 [para. 18][para. 19].
Following its implementation, banks like Goldman Sachs and Morgan Stanley restructured by reallocating proprietary traders to wealth management and market-making divisions. Wall Street banks' total revenue declined as their proprietary trading revenue in bonds and derivatives markets hit nearly zero [para. 20][para. 21]. Critics argue the rule restricts banks' market-making and risk management abilities, imposing significant compliance burdens [para. 22][para. 23].
Despite simplifying compliance protocols in 2019, allowing for easier distinction between proprietary trading and market-making, and providing exemptions for small banks, skepticism remains about whether these changes might lead to a resurgence in high-risk activities. The Volcker Rule remains a subject of mixed reviews, balancing universal and separated banking operations in the U.S. financial industry [para. 24][para. 25][para. 26][para. 27][para. 28][para. 29].
- Lehman Brothers
雷曼兄弟 - Lehman Brothers, an American investment bank, faced substantial conflicts of interest and risks in its proprietary trading and asset management before 2008. Heavily invested in mortgage-backed securities (MBS) and credit default swaps (CDS), Lehman used high leverage in its operations. The 2008 financial crisis exposed these vulnerabilities, leading to its collapse and exacerbating the global financial turmoil.
- Goldman Sachs
高盛 - Goldman Sachs, heavily impacted by the Volcker Rule, had to disband its proprietary trading teams and shift focus to wealth and asset management. This reorganization resulted in a notable decline in income from bond trading and derivatives, but the firm saw growth in wealth management revenue, which reached $138.8 billion, 30% of its total revenue, by 2023.
- Bear Stearns
贝尔斯登 - Bear Stearns was one of the major U.S. investment banks mentioned in the article. It engaged in proprietary and asset management businesses, facing conflicts of interest and risks. These issues contributed to the 2008 financial crisis. Like other investment banks, Bear Stearns suffered from massive declines in asset values, which eroded investor confidence and exacerbated the crisis.
- Morgan Stanley
摩根士丹利 - Morgan Stanley's total revenue in 2007 was $93 billion, with net profit at $3.1 billion. The institution securities business, including proprietary trading, contributed $51 billion. After the Volcker Rule's implementation in 2014, Morgan Stanley divested assets like Front Point hedge fund and shifted traders to wealth management. Despite compliance costs, the firm continued to face scrutiny, notably in 2018 for high-risk private equity investments within its asset management.
- JP Morgan Chase
摩根大通 - JP Morgan Chase faced significant scrutiny for its proprietary trading activities, particularly after the "London Whale" incident in 2012, which led to a $6 billion loss disguised as hedging. Following the incident, the bank accelerated the cleanup and dissolution of its proprietary trading desk in compliance with the Volcker Rule, which ultimately took effect in April 2014. The rule restricts banks from engaging in high-risk proprietary trading and limits their investments in hedge funds or private equity.
- Citigroup
花旗集团 - Citigroup initially transferred part of its proprietary trading to its asset management unit, Citi Capital Advisors, managing billions in hedge and private equity funds which were still high-risk. Although these activities were ostensibly third-party managed, Citigroup's traders controlled many investment decisions. Citigroup ultimately divested this unit in 2013.
- Prior to 2008：
- American investment banks experience conflicts of interest and potential risk issues between proprietary trading and asset management.
- 2008：
- Financial crisis exacerbates due to the rapid depreciation of assets held by proprietary trading desks at banks.
- 2012：
- $6 billion trading loss by JPMorgan Chase, known as the 'London Whale' incident, occurs.
- 2013：
- Citigroup spins off and sells its proprietary trading operations that were transferred to Citi Capital Advisors.
- July 2010：
- Passage of the Dodd-Frank Act, which establishes the Financial Stability Oversight Council (FSOC) and implements stricter oversight and capital requirements.
- April 2014：
- The Volcker Rule takes effect.
- July 2015：
- Deadline for full compliance with the Volcker Rule.
- 2015：
- Goldman Sachs' total revenue falls to $33.7 billion.
- By 2016：
- Goldman Sachs restructures its business architecture around customer needs and begins focusing on retail banking.
- 2018：
- Morgan Stanley found to be continuing private equity investments similar to proprietary trading through its asset management division.
- October 2019：
- The Federal Reserve and four other regulatory agencies approve amendments to the Volcker Rule, relaxing certain requirements and reducing compliance burdens.
- December 2019：
- Former Federal Reserve Chairman Paul Volcker, who proposed the Volcker Rule, passes away.
- 2023：
- Goldman Sachs reports operating revenue of $46.25 billion with wealth and asset management business revenue at $13.88 billion.
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