George Osborne lines up with the banking lobby

George Osborne has an oped in the Financial Times today, co-written with the Japanese finance minister, in which the Chancellor attacks the planned US “Volcker rule”,  the new regulation designed to prevent large, taxpayer-underwritten, American banks taking massive bets on movements in financial markets.

Here’s Osborne’s objection:

“These proposals aim to reduce risky behaviour within banks. However, there is an exemption for trading in US government securities but not other sovereigns, so it could reduce liquidity in non-US sovereign markets, making it more difficult, costlier and riskier for countries to issue and distribute debt. At such a vulnerable time in the sovereign debt markets, it would be the wrong prescription. The rule could also disincentivise foreign companies from transacting with their US counterparties, reducing market liquidity and potentially increasing price volatility regarding financial transactions such as foreign exchange swaps. Japan’s and Britain’s governments are discussing with the US how we ensure reform supports international as well as domestic financial stability.”

What he’s saying is that the Volcker rule will curb the appetite of large banks to trade in British sovereign debt, which will supposedly make the market less liquid and thus push up national borrowing rates.

The former US Federal Reserve chairman, Paul Volcker, has previously answered this complaint.

“Can it really be of concern that some of the largest banks in Europe, in Japan, in China and indeed in Canada cannot maintain effective markets in their own sovereign debt? US chartered commercial banks could remain participants ‘making markets’ for their customers wherever they are. Let’s get serious.”

In other words, Volcker thinks the argument that forbidding US banks from trading British or other nations’ sovereign debt will harm those economies is bunkum. Well it’s bunkum that our Chancellor has bought.

Volcker also said that the opposition is being driven by the banking lobby:

“Let us not be swayed by the smokescreen of lobbyists dedicated to protecting the interests of some highly compensated traders and their risk-prone banks.”

The Chancellor has lined up with the banking lobby on a key anti-reform push. Not encouraging for those hoping that the Treasury will resist those same vested interests as they try to gut the retail bank ring fencing reforms here in the UK.

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