WSJ reports:
A working paper by economists Jussi Keppoy and Josef Kortez examines the effect of the Dodd-Frank law's ban on proprietary trading. It finds that banks whose business models traditionally had 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 maintained 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 Treasurys.
That may help explain why collective holdings of Treasurys by banks have increased so much this year. In the first quarter, banks increased Treasury holdings 23%. What may have looked like caution may have actually concealed speculation. Risk at banks is like a balloon: If you squeeze one end, the other bubbles and bulges.
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