Making Banks Safer: Can Volcker and Vickers Do it?
IMF Working Papers, October 1, 2011
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- Making Banks Safer: Can Volcker and Vickers Do it?
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Bibliographic details
- Authors: Julian T Chow, Jay Surti
- Published: October 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463922023.001
Summary and central argument
- This paper assesses proposals to redefine the scope of activities of systemically important financial institutions as solutions to the too-important-to-fail problem.
- While more radical proposals such as narrow utility banking are judged not to adequately address key policy objectives, two concrete policy measures are highlighted as more promising:
- the Volcker Rule in the United States, and
- retail ring-fencing in the United Kingdom.
- Both measures are seen as entailing significant implementation challenges.
- A common risk factor identified is the potential for activities deemed too risky for retail banks to migrate to the unregulated parts of the financial system, which could lead to accumulation of systemic risk if left unchecked.
- The paper concludes that it appears unlikely any structural engineering will lessen the policing burden on prudential authorities and on the banks.
Policy measures assessed
- Volcker Rule (United States)
- Presented as one of two more promising concrete measures to limit risky activities within banks.
- Retail ring-fencing (United Kingdom)
- Presented as the other promising concrete measure to separate retail banking from riskier activities.
- Narrow utility banking
- Classified among the more radical proposals and judged not to adequately meet key policy objectives.
Implementation challenges and systemic risks
- Significant implementation challenges are associated with both the Volcker Rule and retail ring-fencing.
- Migration risk:
- Activities identified as too risky for retail banks may migrate to unregulated parts of the financial system.
- Such migration could lead to accumulation of systemic risk if not addressed.
- Enforcement and supervision burden:
- Structural changes alone are unlikely to reduce the policing burden on prudential authorities and on banks.
Subjects and keywords
- Subject terms: Banking, Commercial banks, Credit, Financial institutions, Financial sector policy and analysis, Financial services, Investment banking, Money, Securities, Shadow banking, Systemic risk
- Keywords: Asia and Pacific, bank management, banking group, Banks, Business Models, Commercial banks, Credit, Europe, Global, Investment banking, proprietary trading, ring-fenced bank, Securities, Systemic Risk, utility bank, WP