Saturday, May 19, 2012

Requisite Variety and Wall Street Regulation

Opinions are divided within JP Morgan Chase about the proposed Volcker Rule for Wall Street Regulation. Its chief executive, Mr Jamie Dimon, has repeatedly mocked the new rule that bans proprietary trading in Wall Street banks, and is on record saying that Paul Volcker, a former chairman of the Federal Reserve and first proponent of banning prop trading, "doesn't understand capital markets".

Nobody seems to be quite sure whether the Volcker Rule would have prevented JP Morgan's recent loss of $4bn in a series of dodgy trades. Someone called BankerGuy has argued that the Volcker Rule is in fact not complex enough, saying it lacks requisite variety. Stephen Foley comments, "Modern capital markets are complex places, like it or not, and they require complex regulation. If Jamie Dimon believes the Volcker Rule is too complex to implement, it follows that his bank is too complex, too."

Meanwhile, some other executives at JP Morgan are more positive about the Volcker Rule. Diane Genova, general counsel of JPMorgan Chase's investment bank, speaking at the International Swaps and Derivatives Association conference earlier this month, called the proposed metrics "a really good effort" to define prop trading, and she went on: "We would probably use these anyway as risk management tools. Getting ready to implement these would not be a waste of time."

Stephen Foley, At a stroke, Jamie Dimon has become Exhibit A in the case for regulation (The Independent, 19 May 2012)

Hugh Hewitt, The Latest From Banker Guy, 1 February 2010 (via Buster Foghorn)

See also Regulation and Complexity (Oct 2012)

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