Bloomberg View: Simplify the Volcker Rule; a White House Dodge on Corporate Taxes

The Volcker Rule is facing heavy criticism as regulators prepare a final version. In recent days big banks, investment managers, and even the governments of Germany, Japan, and Britain have lamented what they see as the rule’s adverse effects. Their primary complaint relates to a section that allows banks to engage in the business known as market making. This useful activity, which helps customers buy or sell financial instruments, is dominated by a handful of banks. It can be difficult to distinguish from proprietary trading because both tend to involve buying and selling for the bank’s own account. Market makers do so in anticipation of clients’ needs. Prop traders do so solely to make bets with shareholders’ and creditors’ money.

The rule’s critics worry that aggressive efforts to eliminate proprietary trading will complicate market making, leading banks to charge more for the service or pull out of the business entirely. This, in turn, could prompt investors to demand a higher return to compensate for the extra difficulty in making trades, thus increasing borrowing costs for governments and companies. One study, commissioned by a financial-industry trade group, estimates that the decreased liquidity—that is, the impaired ability to trade quickly and inexpensively—could add as much as $43 billion a year in borrowing costs for U.S. corporations while knocking as much as $315 billion off the value of existing corporate bonds.