Volcker rule liquidity carveout stirs fears of next Whale trade

By Alexandra Alper

Banks are urging U.S. authorities to broaden a little-noticed exemption in the Volcker rule’s trading curb that critics say could blind regulators to the next version of the JPMorgan Chase & Co Whale trade. Advocates say the rule is needed to make sure banks that receive government backstops like deposit insurance don’t make risky bets that could blow up and create the need for a taxpayer bailout. Wall Street has pushed back, saying the rule is too severe and will prevent banks from managing their operations, especially their ability to hedge risk. At the center of debate are hedging and market-making exemptions tucked into the proposal that regulators issued in October. Some banking industry experts say there is some truth in the banks’ dire predictions. “The more tightly you draw (the Volcker rule) to avoid loopholes with regard to liquidity risk management, the harder you make it for banks to control one of the most significant systemic risks,” said Karen Petrou, managing partner of Federal Financial Analytics, a Washington-based financial services consulting firm. Petrou would like to see the exemption maintained, but with fewer requirements to prove that accounts are solely for near-term funding needs. “It is vital that the Volcker rule be crafted in a way that it in no way undermines liquidity risk management.”