Study Says Banks Will Always Fail at Trading

Arnoud_Boot

According to a study by economists Arnoud Boot at the University of Amsterdam and Lev Ratnovski at the International Monetary Fund (IMF), the financial crisis over the past few years are a “sign of deeper structural problems in the financial system” and banks need to engage in less trading before they crash the economy again.

Boot and Ratnovski wrote, “Without policy action, crises associated with trading by banks are bound to recur. Even strong supervision will not be able to prevent them. Consequently, it appears necessary to restrict trading by banks.”

The economists explain that banks have large amounts of capital lying around and it is simply too tempting for them to take that capital and trade it in the hopes of making more profit. Considering the current economic climate with many factors going against the banks, Boot and Ratnovski say that banks will trade too much, “and in too risky a fashion.”

It seems unlikely that this will change any time soon, however Boot and Ratnovski maintain that this banking model is obsolete and “no longer sustainable.” For them, the solution lies in something similar to the Volcker Rule which would prohibit banks from trading on their own account, but should be allowed to underwrite stocks and bonds or “sensible hedging.”

Banks argue that this last part is a problem. They say that it is impossible to tell the difference between this sensible trading and the risky trading they are being accused of. One thing’s for sure, it won’t be a risky bet for many to say that the banks will fight to find any loopholes should restrictions be put in place.

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