Banks Amass $211 Trillion In DerivativesSubmitted by Charleston Voice on Sat, 05/12/2012 - 21:56
...JP Morgan Loses $2 Billion And Volcher Rule Debates Continue
Posted on May 11, 2012
The goal of the Volcker Rule, which became law under the Dodd-Frank Act was to restrict speculative trading activity in risky derivatives by the Too Big To Fail Banks. The ban on proprietary bank trading was proposed by former Federal Reserve Chairman Paul Volcker who believed that one of the primary causes of the 2008 financial meltdown was a result of speculative trading activity by banks.
Volcker argued that the use of depositor money back by FDIC deposit insurance to engage in risky speculation created systemic risk to the U.S. financial system. In addition, Volcker said that banks holding massive positions in derivatives to allegedly control risk were, in fact, creating even greater risk to the financial system.
Under the Dodd-Frank Act, the Volcker Rule’s provisions were scheduled to be implemented by July 21, 2012. During the two years since the Volcker Rule became law, regulators, bankers, legislators and lobbyists have been in a non stop battle over how the rule should be implemented and can’t even agree on what date the Volcker Rule regulations should become effective.
Meanwhile, the biggest banks in the country have built up massive speculative positions in derivatives. The Too Big To Fail Banks, by engaging in activities more suited to hedge funds and casinos, have added an element of instability and risk to the financial system that was supposed to be eliminated by the Volcker Rule.
Evidence of the fact that the Too Big To Fail Banks have not taken the Volcker Rule seriously can be seen in the latest numbers published by the FDIC. As of December 31, 2011, the 7 largest banks in the country held an astonishing $211.2 trillion in derivative contracts. By way of comparison, the entire gross domestic product of the United States is only about $15 trillion.
The composition of the $211.2 trillion of derivatives is primarily related to bets on interest rates...
Read more: Banks Amass $211 Trillion In Derivatives