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Synopsis

Life is becoming more complex for risk managers. We must have a "forward-looking perspective", remember?
We have all these new laws and regulations ...
... but we also have rules, proposals and reports to consider.
Have you ever discovered the common elements of the various initiatives, including the Volcker rule in the United States, the proposals of the Vickers Commission for the United Kingdom, the Liikanen Report to the European Commission?
Leonardo Gambacorta and Adrian van Rixtel from the Monetary and Economic Department of the BIS will help us today to see the common elements and the differences!
This is a great analysis! We read:
The Volcker rule is narrow in scope but otherwise quite strict.
It is narrow in that it seeks to carve out only proprietary trading while allowing market-making activities on behalf of customers.
Moreover, it has several exemptions, including for transactions in specific instruments, such as US Treasury and agency securities.
It is strict in that it forbids the coexistence of such trading activities and other banking activities in different subsidiaries within the same group.
It similarly prevents investments in, and sponsorship of, entities that could expose institutions to equivalent risks, such as hedge funds and private equity funds.
That said, it imposes very few additional restrictions on the transactions of banking organisations with other financial firms more generally (eg such as through constraints on lending or funding among them).
However, it is worth remembering that the current US legislation does constrain the activities of depository institutions.
The Liikanen Report proposals are somewhat broader in scope but less strict.
They are broader because they seek to carve out both proprietary trading and market-making, without drawing a distinction between the two.
They are less strict because they allow these activities to coexist with other banking business within the same group as long as these are carried out in separate subsidiaries.
The proposals limit contagion within the group by requiring, in particular, that the subsidiaries be self-sufficient in terms of capital and liquidity and that transactions between the legal entities take place on market terms.
Just like the Volcker rule, the proposals do not envisage significant restrictions between the protected banking unit and other financial firms, except that they require the separation of exposures to entities such as hedge funds and special investment vehicles (SIVs) in the trading entity.
The Vickers Commission proposals are even broader in scope but have a more articulated approach to strictness.
Read more at Number 3 below.
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