Bloomberg News

Volcker Rule May Harm EU Banks, Barnier Warns Bernanke, Geithner

February 17, 2012

Feb. 16 (Bloomberg) -- The European Union’s financial- services chief criticized parts of the U.S.’s proposed Volcker rule, warning that it would place a “disproportionate” burden on EU lenders and risk damaging markets.

Michel Barnier wrote to U.S. regulators including Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy F. Geithner complaining that the measure as drafted would also hamper governments’ ability to sell sovereign debt, according to a copy of his letter obtained by Bloomberg News.

The measure may have “a number of unintended, non- justifiable consequences for non-U.S. banks, markets and institutions,” Barnier, the European commissioner responsible for drafting financial-services legislation, said in the letter dated Feb. 8.

The rule, named for former Fed Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, would seek to ban banks from proprietary trading while allowing them to continue short-term trades for hedging or market-making. It also would limit banks’ investments in private-equity and hedge funds.

The U.S. proposal is one of the most contentious provisions of the Dodd-Frank Act, the regulatory overhaul enacted in 2010. A 298-page proposal released by U.S. regulators in October included more than 1,300 questions for affected banks to consider during the comment period, which closed this week.

The draft has also been criticized by U.S. lenders including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp., alongside foreign banks and governments, who warn that it would increase risk, raise costs for investors and be vulnerable to legal challenge.

Banks Confused

Barnier’s concerns include that the rule doesn’t clearly define which activities will be banned, leaving banks confused as to what kinds of market-making will be allowed.

“There is a real risk that banks impacted by the rule would also significantly reduce their market-making activities, reducing liquidity in many markets both within and outside the United States,” Barnier said in the letter.

The measure would have “implications that are disproportionate in light of the objective that the rule is trying to achieve,” he said, including by placing “burdensome reporting and compliance requirements” on EU lenders.

Barnier has said he will raise the Volcker rule when he travels to the U.S. for meetings with regulators on Feb. 23-24.

--Editors: Peter Chapman, Jones Hayden

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net;


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