Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every
Speaker 1: day we bring you insight and analysis into the most
Speaker 1: important legal news of the day. You can find more
Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud
Speaker 1: and on Bloomberg dot com slash podcasts. A Trump administration
Speaker 1: de regulatory priority will take effect on January one, as
Speaker 1: two regulators ease the Vocal Rules controversial ban on banks
Speaker 1: making speculative investments. It's called Vocer two point no. Joining
Speaker 1: me as Robert Hockety, professor at Cornell Law School, Bob
Speaker 1: tell us about the biggest changes that were approved with
Speaker 1: this new rule, I do, yeah. This is the principle change.
Speaker 1: I think, the one that this most movie most welcome
Speaker 1: on the front of the banks is a change in
Speaker 1: the presumption that was part of the Vocal rule before.
Speaker 1: So previously, the presumptions that you were if you were
Speaker 1: engaging in short term trading, it was probably speculative other
Speaker 1: than hedging, and it was up to you to rebut
Speaker 1: that presumption, so basically to prove that you are innocent,
Speaker 1: so to speak, or that you were merely hedging in
Speaker 1: other words, rather than speculating. Uh, that presumption will go
Speaker 1: by the wayside now, and I think that that's probably
Speaker 1: going to elicit the greatest sort of sigh of relief
Speaker 1: on the part of the banks. How much of a
Speaker 1: victory is this for the banks? It's it's easy to
Speaker 1: overstate the degree of the victory, but but it's to
Speaker 1: some extent going to determine. I mean, it's going to
Speaker 1: sort of depend on what what what. The actual cause
Speaker 1: of the sort of cutback and proprietary trading over the
Speaker 1: last few years has been right, so as you know,
Speaker 1: the proprietary trading books of the larger banks are much
Speaker 1: smaller than they were before Vulker went into effect. But
Speaker 1: there's some sort of uncertainty I guess we would say
Speaker 1: as to whether the Volcan the rule itself was a
Speaker 1: reason for that, or whether there are other reasons that
Speaker 1: sound more in sort of changes in the industry. If
Speaker 1: it's the latter than the change in Vulcar isn't going
Speaker 1: to make much difference. If, on the other hand, the
Speaker 1: Vulcar rule itself was an important part of that story, well,
Speaker 1: then of course it could bring about an up search
Speaker 1: in proprietary trading of a kind that was quite common
Speaker 1: of course, before one Democratic fd i C board member
Speaker 1: warned that the rollback could again endanger the financial system
Speaker 1: by allowing lenders to recklessly trade hundreds of billions of
Speaker 1: dollars in risky assets as they did before the financial crisis.
Speaker 1: Do you agree with that? Well, I understand where Mr
Speaker 1: Grinberg's coming from on that, But again, whether he's right
Speaker 1: or not sort of depends again on what the cause
Speaker 1: of the decline and proprietary trading since has been. If,
Speaker 1: again that was owing to the vocal rule itself, that
Speaker 1: he could very well be right. If, on the other hand,
Speaker 1: there have just been changes in the industry that makes
Speaker 1: proprietary proprietary trading less attractive than it used to be,
Speaker 1: then it might very well be that his alarm it's
Speaker 1: not quite as justified. Does the new rule give lenders
Speaker 1: a better picture of what trades are prohibited? I think
Speaker 1: it resolves a certain kind of uncertainty on their part, right,
Speaker 1: I think. And it's not so much an uncertainty as
Speaker 1: to whether you know their trades a proprietary or not,
Speaker 1: because they would actually whether the trades are specultive or not,
Speaker 1: because ultimately they know that. But what it doesn't do is.
Speaker 1: I think it resolved some uncertainty that they would be
Speaker 1: experiencing as to whether the regulators would be likely to
Speaker 1: find that to be the case or not. And in
Speaker 1: that sense it does resolve in uncertainty that's probably helpful
Speaker 1: to them. And what about compliance costs, Well, this ease
Speaker 1: some of the compliance costs. It should make compliance a
Speaker 1: little bit less costly because you're not as concerned with
Speaker 1: proving what your motives were engaging in the particular trades
Speaker 1: that you were engaging. And in other words, the fact
Speaker 1: that the presumption of guilt, so to speak, is being
Speaker 1: removed itself makes it easier to comply because you don't
Speaker 1: have to do as much proving as you would otherwise
Speaker 1: have had to do. And um, do you anticipate that
Speaker 1: there might there will be more increased investments for the banks.
Speaker 1: I'm a little kept to cool about that, June, but
Speaker 1: because I really don't think that the degree of additional
Speaker 1: liquidity that comes through proprietary trading of the science of
Speaker 1: the banks do really makes that much difference to the
Speaker 1: actual investing that they do. It makes a difference to
Speaker 1: the trading that they do. The trading is the secondary
Speaker 1: market activity of course, and investing is a somewhat different
Speaker 1: sort of operations. And I'm actually skeptical that the sort
Speaker 1: of additional degree of liquidity that might be provided by
Speaker 1: the additional degree of trading that might be engaged in
Speaker 1: is going to make any serious difference to the amount
Speaker 1: of investing. And I think the amount of investing ultimately
Speaker 1: rides on what the prospects of adding value to the
Speaker 1: primary economy are, and you know, that's really a matter
Speaker 1: of the real economy rather than the financial economy. So
Speaker 1: then you think that it's sort of the complaints about
Speaker 1: this from some regulators are are overblown. I think they
Speaker 1: probably are overblown. Um, I think the complaints about the
Speaker 1: rule being in existence at all were very much overblown.
Speaker 1: But I also think that the complaints about easing up
Speaker 1: on the rule are overblown. Basically, this is a so
Speaker 1: called This is a form of so called smart regulation
Speaker 1: that tends to be sort of too clever by half.
Speaker 1: I think those who sort of propound things like this
Speaker 1: rather than more kind of bright line rules like the
Speaker 1: Glass Equal Act used to have in place. Um, you know,
Speaker 1: the claims on behalf of rules like this are always overblown.
Speaker 1: But at the same time, I think the complaints about
Speaker 1: them tend to be overblown as well. So I think
Speaker 1: in many ways it's sort of a tempest in a teapot.
Speaker 1: I mean, I know, a lot of money is at stake,
Speaker 1: a lot of profiting is at stake, But when it
Speaker 1: comes to actual you know, productive activity in the real economy,
Speaker 1: I don't think any of this makes that much difference
Speaker 1: one way or the other. Well, I suppose the Trump
Speaker 1: administration has been has been focused on this, or at
Speaker 1: least the regulators have. There are some other Wall Street
Speaker 1: rules that are awaiting revision, so to speak. Let's talk
Speaker 1: that those a little bit sure sure, So you know,
Speaker 1: one one another kind of top of the lister, you
Speaker 1: might say, has to do with the stress test of banks,
Speaker 1: you know, under the bed stress test reagime. That was
Speaker 1: another one of the sort of hallmarks of the post
Speaker 1: crash reforms during the early Obama years. And you know,
Speaker 1: there's been a lot of discussion about whether the banks
Speaker 1: should be sort of given more guidance in advance as
Speaker 1: to what actually is going to be tested for. Right,
Speaker 1: those who think it's a good idea to allow for that, say, again,
Speaker 1: just like they say in connection with Bulker now that
Speaker 1: they would afford more certainty of the banks, the banks
Speaker 1: would have less uncertainty, and compliance would be easier. On
Speaker 1: the other hands, the counter argument is that you know,
Speaker 1: they you know the old bit about people teaching to
Speaker 1: the test. You know, if people know in advance what
Speaker 1: sorts of questions are going to be on the test,
Speaker 1: and they can kind of gain the systems that were
Speaker 1: to make sure that they pass UM And so it
Speaker 1: might well be that the fundamentals are not as sound
Speaker 1: as they look when banks passed their stress tests if
Speaker 1: it's possible for them basically to kind of again gain
Speaker 1: the system once they know what the questions are going
Speaker 1: to be. So UM, we look to be likely to
Speaker 1: see some significant changes on the stress in the stress
Speaker 1: testing machine very soon, and I actually think that could
Speaker 1: be potentially more momentous than the changes in Bulker. Really, well,
Speaker 1: that'll be intervidual talk about it again then, I'm sure, Bob.
Speaker 1: Thanks so much. That's Robert Hockin of Cornell Law School.
Speaker 1: Thanks for listening to the Bloomberg Law Podcast. You can
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Speaker 1: and on Bloomberg dot com. Slash podcast I'm June Brosso.
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