During the global financial crisis between 2007 and 2008, the United States congress passed financial regulatory reform known as the Dodd-Frank Wall Street Reform and Consumer Protection Act
. It was signed into law
by President Barack Obama on Jul. 21, 2010.
In one specific section of the legislation, there is a measure named the Volcker Rule. The Volcker Rule, suggested by former Federal Reserve Chairman Paul Volcker, who served as Fed chairman from 1979 to 1987, restricts U.S. banks from making specific speculative investments that do no benefit their customers.
The former Chairperson of President Barack Obama’s Economic Advisory Board argued that this type of behaviour contributed to the financial meltdown. It is expected to be imposed on July 21 of this year.
On Monday, Canadian Finance Minister Jim Flaherty
and Bank of Canada Governor Mark Carney
both issued a letter to their U.S. counterparts, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.
In their letters, the two Canadian officials expressed concern over the Volcker Rule, although Flaherty and Carney both noted that they support the “underlying policy objective” of the proposed measure, but explained why they are concerned.
Flaherty’s letter states that he believes the rule as written has an “unprecedented extraterritorial reach” that could possibly affect Canada’s financial institutions and markets. The letters also argue that its southern neighbour’s attempts at financial regulatory reforms could actually hinder Canada’s financial regulations.
“Without a change to the rule, a Canadian covered banking entity could be precluded from continuing to sponsor such a fund if it had unitholders resident in the U.S., even temporarily,” wrote Flaherty. “This would be inconsistent with the longstanding regulatory practices of the Securities and Exchange Commission to allow Canadian mutual funds to deal with Canadians temporarily resident in the U.S.”
Meanwhile, Carney wrote that the Volcker Rule extends beyond U.S.-insured depository institutions and implements “significant restrictions” on various Canadian financial institutions by “limiting their use of U.S.-based resources” as well as their personnel and market infrastructure.
It argues that it would prevent the institutions from trading, cooperating and working with its U.S. counterparts.
“These restrictions may have important adverse consequences for Canada, limiting the liquidity of Canadian markets and hence the resilience of the Canadian financial system. Indeed, the proposed rule may undermine, rather than support, progress toward creating a safer, more resilient and more efficient global financial system,” wrote Carney in his letter.
Canada isn’t the first country to communicate unease over the Volcker Rule. Nations such as the United Kimgdom and Japan have announced their apprehensions.
reported that the UK Treasury stated that the Volcker Rule could curb liquidity on government-bond markets because banks would reduce trading on their own accounts.
The same news outlet reported
that Japan’s central bank and financial regulators also wrote a letter to their U.S. counterparts and said the proposed rule could increase the cost of trading Japanese bonds unless it was exempted.