While President Barack Obama took aim at U.S. banks and their proprietary trading practices last week, the folks creating regulations about how much capital banks need to put aside to
guard against the types of financial and operational risks banks face, seem more willing to support it.
Michael Goldberg, Desjardins Securities analyst, said the latest Basel 2.1 proposals are soft on proprietary trading, which involves banks using their own money as opposed to its customers' money in order to make a profit.
"The inherent belief seems to be that there is nothing wrong with proprietary trading; the models just have to better capture the risks," said Mr. Goldberg in a note to clients.
He noted that proprietary trading has been wrongly characterized as being similar to putting a casino at the top of a bank. Indeed, he thinks it is too harsh a condemnation of casinos.
In a casino, he reasoned, the odds truly favour the house. He said the casino also knows what the odds are for all of the games and it can charge enough to mitigate its tail risk.
Additionally, Mr. Goldberg noted that casinos are generally regulated so that they cannot engage in pricing competition that undercuts their ability to earn underwriting profit. Short of that, casinos can simply change the rules going forward, stopping successful gamblers from making new bets.
"Perhaps a better analogy is that proprietary trading involves gamblers employed by a bank, who have convinced management to bankroll them at a casino because they believe that they have developed a 'system' that can beat the house," he wrote.
"And, it may be that most of the time the system does beat the house. But, when it does not, the losses can be spectacular. The public policy question, still being debated, is whether depositors should fund this activity."
Based on his 2010 forecasts, Mr. Goldberg said the ratio of net capital markets revenue to banks' operating profit in Canada would average 20% for the major banks.
Individually, National Bank' ratio would be 35%, Royal Bank of Canada would be 29%, Bank of Montreal, 23%, Bank of Nova Scotia and TD Bank, 17%, and CIBC, 15%.
"While this captures far more than proprietary trading, we believe that National Bank's high ratio is indicative of its greater sensitivity," he said.