prototypical banking relationship that exists to allocate financing from depositors to projects that produce value. i view proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop. nonetheless, the volcker rule, as written by congress, provides limited exemptions to this proprietary trading ban, so activities that would otherwise constitute proprietary trading can be permitted if those activities constitute hedging or market - making and do not threaten the soundness of the bank or the stability of the financial system as a whole. stated in terms of the analogy i have been using here, federally insured financial institutions and their affiliates can operate in narrow circumstances along the lines of a low - road banking model where there are sufficient guard rails in place to protect the integrity of the banking system. these guard rails are those limited exemptions based on safety and soundness and financial stability. the law mandates that the five regulators craft their implementing regulations to reflect the broad prohibition on proprietary trading activities by regulated banks, albeit with exemptions. the regulators then need to carefully examine whether exemptions like market - making or hedging can be conducted by the financial institution within the guard rails of safety and soundness and financial stability and therefore fit within the exemptions as congress intended. i dissented in the vote for approval of the proposed implementation of the volcker rule. let me say a bit about that dissent now. one reason for my vote was my sense that the proposed regulation ’ s guard rails were insufficient. i was concerned that, as proposed, the guard rails were too broad and would allow banks to be able to go too far off the road. further, i was concerned that the guard rails as crafted could be subject to significant abuse – abuse that would be very hard for even the best supervisors to catch. i feel it is very important that the guard rails be strong and be set very close to the road because of the potentially severe dangers of, and costs associated with, proprietary trading by institutions that have access to the federal safety net. in fact, it is not inconceivable to think that the potential costs associated with permitting hedging and market - making within these exemptions still outweigh the benefits we as a society supposedly receive from permitting these capital market activities. the potential compliance, supervisory, and other costs could be so great as to eliminate whatever value may arguably be derived by virtue of these capital market activities. what might such

relationship between financial markets and the public compels decisionmakers to correct the adverse incentives and moral hazards created by low - road business models. in my view, though, the regulation of low - road banking models is not without cost. indeed, some banking models are so complicated that they cannot be regulated without the expenditure of significant public or private dollars. when these business models have such a distant connection to meaningful financial intermediation, i believe that we as a society may very well want to rethink whether we want to support these business models at all. the costs of supporting them, simply put, may be prohibitive. indeed, there may not be worthwhile regulatory approaches to all problems, even where the benefits of an activity outweigh the costs to regulate it. for example, when considering the “ cost - to - regulate ” perspective, some regulatory structures consist of rules that are based solely on metrics. while such rules may have the advantage of being less costly and easier to implement than a more subjective rule, as a regulator, i have to ask whether a metricbased rule will foster the development of internal controls, processes, and cultures that are capable of correcting the problems embedded in a low - road business model. metrics - based oversight regimes do not work well in correcting misaligned incentives if the metrics in the see “ putting the low road behind us, ” speech delivered at the 2011 midwinter housing finance conference, park city, utah, february 11. nixon, simon ( 2012 ). “ lie bores into credibility of barclays and the city, ” wall street journal, june 28, http : / / online. wsj. com / article / sb10001424052702304830704577492963344243348. html. bis central bankers ’ speeches regime can be manipulated. it is the potential of metrics manipulation that leads me to favor, in certain instances, clear restrictions on the scope of particularly unproductive activities. let ’ s look at the “ volcker rule ” and consider the benefits of a specific activity and the costs to regulate this activity. the volcker rule, which was included in the dodd - frank act and should have the biggest impact on the largest and most complex financial institutions, prohibits proprietary trading by federally insured banks and their affiliates, such as brokerdealers. proprietary trading by such financial institutions is a capital markets activity quite distinct from the