By John Carney, includes “The Volcker Rule may have sprung a leak. A new working paper by economists Jussi Keppo and Josef Korte examines the effect of the Dodd-Frank Act’s ban on proprietary trading. It finds that banks whose business models had traditionally been geared toward activities limited by the Volcker Rule—basically, the big Wall Street banks—have indeed reduced the size of their trading books. But they haven’t cut the risks they take. According to the paper, banks have managed to maintain their risk-taking in two ways: they have reduced the hedging of their banking books and increased the speculative uses of trading assets not limited by the Volcker Rule. Those assets would include U.S. Treasurys. That may help explain why the collective holdings of Treasurys by banks have grown so much this year. In the first quarter, banks grew Treasury holdings by 23%. What may have looked like banks becoming cautious may have actually concealed a move toward post-Volcker speculation. Risk at banks is a bit like a balloon: if you squeeze one end, the other end bubbles and bulges.”
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