The partisans of the Volcker Rule would ban banks from taking proprietary risk positions...

J.P. Morgan and the conceptual confusion of the Volcker rule

Alex J. Pollock

We have certainly heard a lot about the $2 billion "trading loss" at J.P. Morgan, which is of course not at all the same as the bank experiencing a loss on its bottom line. From the perspective of the corporate profit and loss statement, a trading loss is one expense item in the context of all revenues and expenses. So $2 billion should be compared to the bank's $26.7 billion in pretax profits for 2011, suggesting a reduction of something less than 10 percent in annual profit.

So we have discovered that trading and hedging activities can have losses which somewhat reduce overall profits. Eureka! This ranks with the discovery that if you make loans, some of them will default. Does it justify the partisans of the Volcker Rule which would ban banks from taking proprietary risk positions and make them stick to the "traditional" banking business of making loans?

The American Entreprise Institute