[Photo:  YouTube]

A staff report issued by the Federal Reserve on 12/22 concludes that the Volcker rule, which bans proprietary trading, had a negative effect on corporate bond liquidity – i.e., the ease with which buyers can find sellers and vice versa.

"Our main finding is that the Volcker rule has a deleterious effect on corporate bond liquidity and dealers subject to the rule become less willing to provide liquidity during stress times. While dealers not affected by the Volcker rule have stepped in to provide liquidity, we find that the net effect is a less liquid corporate bond market."

According to Isaac Boltansky at the research firm Compass Point, the paper could be used as "political cover" for Trump and his team as they look to peel away some of the postcrisis financial regulation on Wall Street. He added:

"Although this paper represents staff findings rather than the Federal Reserve's official policy position, our sense is that Volcker rule opponents will use it as definitive proof that the rule should be administratively and legislatively unwound."

That said, he said he remains unconvinced that the Volcker rule will be repealed, as the deregulation effort is likely to focus on lightening the load for smaller banks rather than making life easier for large market-making investment banks. In addition, several senior bankers have said that the repeal of the Volcker rule would have little effect on how they conduct business.

Citigroup CFO John Gerspach said in December that "we don't want to do proprietary trading, but I also would love to work with regulators to lessen the burden of proving that we are not engaging in proprietary trading."

[Click link to continue reading]