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Volcker: Global Regulators Can Create a Regime for Failed Banks

WASHINGTON (The Deal) -- Former Federal Reserve Chairman Paul Volcker on Wednesday said he is optimistic that international bank supervisors will be able to strike agreements on complex cross-border issues that exist when setting up a global system to dismantle a big failing international bank.

"I am optimistic," Volcker told The Deal after speaking at an event at the World Bank in Washington. "It is a big complicated subject but I'm amazed at how much progress is being made. If you get Europe, which is worrying about it, and you certainly will get the US and U.K -- which are close together -- you've pretty much got it."

Volcker's comments come after critics have poked holes in plans for the new system, which is being set up as an alternative to bankruptcy. The aim is to avoid the complex international chaos that followed Lehman Bros.' historic Chapter 11 filing in September 2008 by dismantling a failing global bank in a way that does not wreak havoc on global markets. The Dodd-Frank Act, written in the U.S. after the 2008 financial crisis, required that regulators create a so-called Orderly Liquidation Authority. U.S. regulators are working to set up the OLA and they have been meeting regularly with their international counterparts to make sure it jibes with similar systems being set up in other countries.

Critics of the system being set up say it has too many loose ends. They assert that even if the OLA is used to dismantle a large institution in the U.S., the bank still will be tied up in bankruptcy regimes in other jurisdictions. However, Volcker said he was optimistic about the international effort. He noted that in addition to the U.S. and Europe another key constituent is Japan, which he told The Deal "isn't much of a problem because they are not that complicated."

Nevertheless, in his formal remarks, Volcker acknowledged that there is an effort underway to achieve a common approach to dismantle a failing systemically important bank, adding that it was "hard to perceive of any successful resolution process that proceeds only nationally when the institutions affected are truly international."

In addition, Volcker said there much is being done among global regulators to coordinate and develop complementary standardized rules for bank capital and liquidity. However, he noted that much remains to be done to develop an international system for official oversight and surveillance of derivatives and the entire financial system "beyond the commercial banking system."

Speaking to The Deal, Volcker added that it was "good news" that Goldman, Sachs (GS) and some other large financial institutions are moving to sell parts of their physical commodities units.

Democrats on Capitol Hill have been pressing big banks to divest the units, arguing that their ownership exposes the U.S. financial system to a 2008-style crisis at the same time that a bank's joint ownership of physical commodities and commodities trading units raises questions about manipulation.

Volcker declined to comment on observations by some onlookers that the Volcker Rule, a measure designed to limit speculative trading big banks, is driving this auction process.

Under the rule, which based on a concept put forward by Volcker, banks must shrink and limit what businesses they conduct in their derivatives and proprietary trading operations. Even though physical commodities may not themselves be financial instruments subject to the Volcker Rule, the business may be related to or hedged by swaps and other derivatives and contracts that are subject to the rule. Observers note that limiting bank swaps and derivatives business may drive some large banks to scale back or divest their physical commodities business.

Goldman Sachs on Tuesday said it is "exploring a sale" of its Metro International Trade Services LLC, an operator of warehouses that store metals trading on the London Metals Exchange, according to a spokesman. The auction comes after JPMorgan Chase  (JPM) announced in March that it had agreed to sell most of its physical commodities business to Mercuria Energy Group Ltd.

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