Dissertation-Teodor-Popescu-final-final_03

Proprietary trading: Prohibition or separation?
-A comparison between the European and American regulations –
Student name: Teodor Popescu
Supervisor: Richard Pettinger
Word Count: 11,935
Programme Name: BSc Information Management for Business
Date: 8th
April 2016
UCL School of Management
"This dissertation is submitted as part requirement for a Management joint studies program
at University College London. It is substantially the result of my own work except where
explicitly indicated in the text."
"The dissertation may be freely copied and distributed provided the source is explicitly
acknowledged."

Teodor Popescu Student ID: 13034260
teodor.popescu.13@ucl.ac.uk
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UCL School of Management Grading
Scheme for
MSIN9001
Dissertation
Student
Due Date
Date Submitted (if after due date)
Fail Pass Distinction
<40 40-49 50-59 60-69 70-79 80-89 90+
Literature review
Research design
Execution of
chosen
methodological
approach
Data analysis
Discussion and
conclusion
Readability

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Acknowledgements
First, I would like to thank to my supervisor, Richard Pettinger, for his support and
encouragement he gave me to pursue this challenging topic and for his guidance and patience
in helping me complete this dissertation project throughout the year.
On a further note, I would like to thank to my parents, for their constant support,
inspiration and fantastic patience without whom I wouldn’t have been able to complete this
assignment.
Lastly, I would like to thank to all participants I interviewed, for their willingness to
help, for their time and for their responsiveness, as without their help I wouldn’t have been
able to develop this project.

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Abstract
As the global crisis has forced financial industry regulators to take additional measures to
reduce banking institutions’ systemic risk, this led to a wide set of regulatory measures such
as the American Volcker Rule and the European Banking Structural Reform that target
proprietary trading activities.
This study draws a comparison between the two regulatory developments, focusing on
the effects they have on global banking institutions’ long-term profitability.
The Critical Literature Review examines various points related to the regulations,
such as a description on these measures’ actual purposes, the methods used by regulatory
bodies in achieving their aims or how banking institutions comply with regulatory
requirements. The primary data used in this research is collected through semi-structured
interviews, leading towards the findings that shaped the main comparison.
The conclusion resulted from the data analysis reveals that the European Banking Structural
Reform will be more advantageous for the banking institutions’ profitability over the long
term, due to a wide range of factors such as lower impact on the trading revenues, increased
risk levels or more innovation opportunities in the European side.
Lastly, this paper provides recommendations and opportunities for further research
that could help European and American leaders shape better banking environments.

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Table of contents
DISSERTATION GRADING SHEET….............................................................................................................2
ACKNOWLEDGEMENTS...................................................................................................................................3
ABSTRACT............................................................................................................................................................4
TABLE OF CONTENTS.......................................................................................................................................5
1.0. INTRODUCTION..........................................................................................................................................6
2.0 CRITICAL LITERATURE REVIEW ..........................................................................................................8
2.1. REGULATORY PURPOSE.............................................................................................................................8
2.2. REGULATORY MEANS ..............................................................................................................................10
2.3. BANKING INSTITUTIONS’ COMPLIANCE…..........................................................................................12
2.4. REGULATORY DEVELOPMENTS’ CRITICISM.......................................................................................14
2.5. BANKING INSTITUTIONS’ PROFITABILITY..........................................................................................14
3.0 RESEARCH METHODOLOGY AND DESIGN........................................................................................15
3.1. RESEARCH PHILOSOPHY..........................................................................................................................15
3.2. RESEARCH APPROACH..............................................................................................................................15
3.3. RESEARCH PURPOSE .................................................................................................................................16
3.4. RESEARCH ONTOLOGY ............................................................................................................................16
3.5. RESEARCH METHODOLOGY ...................................................................................................................16
3.6. MONO METHOD ..........................................................................................................................................17
3.7. SEMI-STRUCTURED INTERVIEWS .........................................................................................................17
3.8. QUALITATIVE DATA ANALYSIS ............................................................................................................18
3.9. TIME HORIZONS .........................................................................................................................................18
3.10. RESEARCH ETHICS ..................................................................................................................................18
3.11. REFLECTIONS ON RESEARCH METHODS ..........................................................................................18
4.0. EMPIRICAL FINDINGS.............................................................................................................................19
4.1. PURPOSE SIMILARITY...............................................................................................................................19
4.2. REGULATORY EFFECTS............................................................................................................................20
4.2.1. HIGH RISK DIVERSITY ........................................................................................................................20
4.2.2. COST COMPARISON..............................................................................................................................22
4.2.3. REGULATORY MISUNDERSTANDING CONSEQUENCES……………………………………….23
4.2.4. DECREASED TRADING REVENUES………………………………………………………………...24
4.2.5. LONG-TERM INEFFECTIVENESS.......................................................................................................24
4.3. REGULATORY IMPACT............................................................................................................................. 26
4.3.1 BUSINESS MODEL IMPACT…………………………………………………………………………..26
4.3.1.1 TRADING DEPARTMENTS’ CHALLENGES…………………………………………………….26
4.3.1.2 BUSINESS MODEL SIGNIFICANT CHANGES………………………………..…………………27
4.3.1.3 BANKING ACTIVITY CONCENTRATION SHIFT ……………………………………………....28
4.3.2 INCREASED COMPETITIVENESS........................................................................................................ 28
4.3.2.1 INCREASED VALUE OF FINANCIAL SERVICES………………………………………………28
4.3.2.2 MIXED COMPETITIVE ADVANTAGE…………………………………………………………...29
4.4 STRUCTURAL REFORM DOMINANCE………………………………………………………………….30
5.0. CONCLUSION AND RECOMMENDATIONS…………………............................................................31
5.1. FORCE FIELD ANALYSIS………………………………………………………………………………...31
5.2. RESEARCH OUTPUT……………………………………………………………………………………...33
5.3. RECOMMENDATIONS ………………………………………………………………………………...…34
5.4. OPPORTUNITIES AND LIMITATIONS FOR FURTHER RESEARCH…………………………………34
6.0. REFERENCE LIST………………………………………………………………………………………..35
7.0. APPENDICES ..............................................................................................................................................39
APPENDIX A – REGULATORY DEVELOPMENTS’ CRITICISM…………………………………………..39
APPENDIX B – BANKING INSTITUTIONS’ PROFITABILITY……………………………………………..41
APPENDIX C – INCREASED VALUE OF FINANCIAL SERVICES………………………………………...42
APPENDIX D – INTERVIEW PARTICIPANTS……………………………………………………………….43
APPENDIX E – SAMPLE OF INTERVIEW QUESTIONS……………………………………………………44
APPENDIX F – INTERVIEW ANSWERS’ EXAMPLE…………………………………………………….....45

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1.0 Introduction
The global subprime mortgage crisis has led financial industry regulators to elaborate reforms
that would prevent such disastrous events from happening again.
After the shock, regulatory bodies have developed several frameworks to be implemented to
reduce the global systemically important institutions’ impact on the taxpayers and to create a
safer banking environment.
Therefore, the USA’s competent authorities developed the Dodd-Frank Wall Street Reform
and Consumer Protection Act, including the Volcker Rule, a proprietary trading prohibition
act.
For the purpose of this dissertation, it is important to provide a definition of proprietary
trading: According to the Securities and Exchange Commission, proprietary trading is
defined as “engaging as principal for the trading account of the banking entity in any
purchase or sale of one or more financial instruments” (Volcker Attachment A, 2012).
On the other side, the European Commission created a High-level Expert Group to present
possible reforms in restructuring the EU’s banking sector. It appointed Mr. Erkki Liikanen,
Governor of Bank of Finland as a Chairman of the group to determine whether structural
reforms will strengthen financial stability and improve efficiency and consumer protection
(European Commission, 2014). The Group presented a final report to the European
Commission, known as the Liikanen Proposal that was further agreed, adopted as a Proposal
for Regulation and renamed as the banking structural reform in 2014.
It was important to mention that the EU regulatory initiative is still a Proposal for a
Regulation and it has not been yet enacted to law as there are possibilities for future
adjustments.
However, the two regulatory developments present major differences that could significantly
reshape the global banking industry.
First, the Volcker Rule aims to prohibit, subject to exemptions, banking entities from
engaging in proprietary trading activities and from acquiring or retaining an ownership
interest in or sponsoring a hedge fund or a private equity fund (Morrison Foerster, 2014).
On the other side, the European banking structural reform intends to prevent the largest banks
operating in the EU from engaging in proprietary trading activities or certain relationships
with hedge funds while allowing them to move these activities into a separated business
entity (Deloitte, 2014). It is important to note that these banks are deposit-taking institutions.
Therefore, this regulation aims to protect taxpayers’ money by separating banking proprietary
trading activities from the deposit-taking institution.
Regulations differ in scope too, as the Volcker Rule applies to any party to a trade that is
resident in US. Therefore, foreign subsidiaries of US companies are also within scope, as
well the US subsidiaries of non-US banks (PwC, 2014). By contrast, the banking structural
reform includes both EU headquartered banks and EU subsidiaries or branches of foreign
headquartered banks with more than €30 billion in total assets, and trading activities either
exceeding €70 billion or 10 per cent of the bank's total assets. (European Commission, 2014)
As these regulatory differences will lead to distinct banking environments, this paper aims to
present a comparison between them to decide which approach is more viable from the

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institutions’ profitability viewpoint. It is important to note that the research considers a five
year point after full regulatory implementations.
The paper will begin with an assessment of the existing literature on the regulatory purposes
and means of achieving their aims and continuing with details on how institutions comply
with them. The chapter will then close with existing criticism on the regulations and certain
figures on the global banks’ profitability.
Furthermore, research design is presented together with the data collection process. This will
provide different perspectives from all industry sides, further presented and analysed in the
empirical findings chapter. Lastly, the paper will end with conclusions and recommendations
for the regulators, banking institutions and researchers while also providing future
opportunities for research.
Research question
“Which proprietary trading regulatory approach will prove more advantageous for global
systemically important banks after full implementation?”
Research objectives
1) To examine existing literature for a better understanding of the regulatory frameworks
2) To conduct a systemic gathering and an analysis of the valuable viewpoints on the
American and European proprietary trading regulations from all banking industry sides
3) To draw a comparison framework based on the research results’ major points
4) To draw a conclusion on the advantages of one regulatory approach over the other one.
This paper will put into comparison the two regulations, presenting the effects and impact
they have on global banking institutions. As it is one of the first papers approaching this
contrast, the results will help targeted companies to improve their profitability and to decide
which banking environment is more favourable for their operations.

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2.0 Critical Literature Review
This section will present and critically review the existing literature on the Section 619 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Volcker Rule,
and the European Union equivalent, the Banking Structural Reform and its base on the
proprietary trading activities’ separation initiative, The Liikanen Report.
The chapter begins by presenting the purpose of the overall regulatory position and the aim of
the two regulatory initiatives. Going further, it explores how the Volcker Rule and the
Banking Structural Reform achieve their objectives and provides an in-depth insight into how
do investment banks comply with them. Lastly, this section illustrates the existing criticism
on both regulations and the current literature on the regulatory effects on institutions’
profitability.
2.1 Regulatory purpose
A proposal issued by the European Commission on the 29/01/2014 presents the appointment
of a High-level Expert Group for assessing the need for structural reform of the EU banking
sector,” with the objective of establishing a safe, stable and efficient banking system serving
the needs of citizens, the EU economy and the Internal Market” (European Commission,
2014).
In addition, a further description of the banking structural reform’s purpose is “ to
tackle problems arising from banks being too-big-to-fail in order to provide greater resilience
against potential financial crises, restore trust and confidence in banks, remove risks to public
finances and deliver a change in banking culture” (European Commission, 2014). Therefore,
the regulatory initiative aims a future mitigation of existing risks posed by the banking
industry.
On the other side, the Dodd-Frank Wall Street Reform and Consumer Protection Act,
which includes the Volcker Rule, begins with a statement presenting the aim of promoting
the financial stability of the United States “by improving accountability and transparency in
the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending
bailouts, to protect consumers from abusive financial services practices, and for other
purposes” (Securities and Exchange Commission, 2011)
Furthermore, the Securities and Exchange Commission define the Section 619 of the
Dodd-frank Act as a rule that “…prohibits any banking entity from engaging in proprietary
trading or…acquiring or retaining an ownership interest in, sponsoring, or having certain
relationships with a hedge fund or private equity fund…subject to certain exemptions”
(Securities and Exchange Commission, 2013)
Additionally, Manning, J. (2012) states in an article for The International Banker that a key
feature of the Volcker Rule is also “to improve the culture and governance of trading on Wall
Street” (Manning, 2012).
Going further, The European Commission’s report on the structural measures to improve EU
credit institutions argues that ”the… proposal and the US Volcker Rule share the same
objectives of protecting deposit-taking and lending from ‘casino activities’ “ (European
Commission, 2013). The report also argues that the measures are not identical, touching an

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important point on the scope of these two regulatory initiatives by saying that the Volcker
Rule does not affect only too-big-to-fail institutions, but also smaller banks. The scope of the
regulations received wide criticism, presented later in this chapter.
Therefore, it can be observed that there is a clear drive for an integration of the global
regulatory initiatives, with both regulations aiming for a safer financial system, an end for the
“too-big-too-fail” concept through structural reforms and a banking institutions’ reduced
impact on the taxpayers.
In a research paper from The Manhattan Institute, Gelinas (2012) argues that ”the goal of
financial regulation should be for financial firms to be able to fail without endangering the
broader economy” (Gelinas, 2012), criticizing the implementation of the Volcker Rule and a
lack of a clear goal.
However, Gandhi and Kiefer (2013) present the rationale behind the Volcker Rule around the
fact that “commercial banks participated in speculative activities placing bank capital at
risk…rather than responding to customer needs”. They further complete that “proponents
believe that these…activities add further layers of risk” (Gandhi, Kiefer, 2013).
In addition, according to an interview for the Financier Worldwide, Smith, D.(2014) states
that the Volcker Rule’s “roots are in domestic politics and a felt need to reduce bank size,
rather than in rigorous economics” (Smith, 2014).
Thakor et al. (2012) comments on the main aim of the Volcker Rule of limiting systemic risk
in banking. They further state that this goal “can be achieved more efficiently by asking
banks to set…the appropriate amount of (equity) capital and on-balance-sheet liquidity to
cope with the risks…”( Thakor et al, 2012). Therefore, the existing literature illustrates
valuable alternatives to be considered for both sides aiming to reach a safer banking
environment.
Therefore, the purpose of the Volcker Rule is heavily criticized by experts in the field,
bringing different opinions on the effectiveness of the regulatory solution, as well as pertinent
alternatives of reaching a safer financial system.
The connection between the Volcker Rule and the European Union’s proposal is
evidenced by a PwC report on the impact of bank structural reforms in Europe, stating that
“the EU proposals are a mixture of the Volcker Rule and the UK Financial Services Act 2013
which prohibits deposit-taking banks from dealing investments as principal”.(PwC, 2013).
Lastly, as there is a lot of debate on the regulatory purposes, this study will present
different viewpoints on the matter, shaping a clear statement of the actual regulatory aims.
In conclusion, the regulatory purpose is similar, aiming to end the too-big-to-fail philosophy
and creating safer banking systems but the certain points to be achieved and the methods used
differ substantially. That will further lead to different results that this paper aims to put into
comparison. The regulatory implementation differences will also be discussed in this chapter,
bringing a clearer idea of the differences between the two regulatory acts.

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2.2 Regulatory means
This section aims to present a detailed description of the certain processes that drive the
regulatory acts’ requirements towards achieving their purposes.
To start with, one European Commission’s report states that the Volcker Rule provides a
broader definition of proprietary trading and certain exemptions for the institutions in scope
when compared to the European act (European Commission, 2013).
Additionally, the timeline of the two regulatory pieces also differs drastically. As the Volcker
Rule has already been implemented on July 21, 2015, the EU regulation aimed an obligation
of legal, economical and operational separation of the two entities by 2019, according to the
European Commission. (European Commission, 2015)
Therefore, the timing of the regulations’ issue favoured the EU regulation in properly
defining what to be achieved and the certain steps that have to be taken while using the
Volcker Rule model in order to successfully create a safer environment through the
proprietary trading separation.
Moving forward, Krahnen, P. (2013) presents the Liikanen Proposal’s target as “the breakup
of large and complex institutions into two entities…”.He further describes the separation as
splitting the trading bank and the commercial bank into two legally independent entities with
both being managed under a single holding company. (Krahnen, 2013)
However, a PwC report clearly illustrates the result of the Liikanen proposal, the banking
structural reform, stating that it will require full prohibition of proprietary trading activities in
a banking group that offers deposit-taking services, separating these activities into a separate
subsidiary (PwC, 2013).
Going further, Gambacorta and Rixtel (2013) present in a report published by the Bank for
International Settlements several ways of how the structural bank regulations reduce systemic
risks, such as reducing the complexity and the size of banking organisations and making them
easier to manage and more transparent to outside stakeholders. They also argue that the banks
may respond to these regulations by moving the risky activities “beyond the perimeter of
consolidated regulation” (Gambacorta, Rixtel, 2013), such as shadow banking.
Further on, they comment on other risks, such as the effects on the universal banks’
international activities or the business model diversification that would be more complex to
be supervised and regulated.
The same report illustrates that “The Liikanen Report proposed that trading and market
making activities should be allowed to remain within the same group structure as deposit-
taking to prevent them migrating to the unregulated sector” (Gambacorta, Rixtel, 2013)
On the other side, Zeissler and Metrick (2014) present the fact that the Volcker Rule requires
banks to add to their internal control processes a compliance program “designed to ensure
and monitor compliance with the restrictions on proprietary trading”. The large banks with
total assets of $50 billion or more must establish a compliance program (Zeissler, Metrick
2014).
Further on, Manning, J.(2012) states in the International Banker that the Volcker Rule

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imposes responsibilities for the in-scope institutions’ CEOs. Concretely, they will be required
to “annually attest in writing that the company has procedures to establish, maintain, enforce,
review, test and modify the compliance program” they have to follow (Manning, 2012).
Therefore, all of these requirements clearly illustrate how the Volcker Rule aims to achieve a
safer banking system.
Zeissler and Metrick (2014) also state in a research paper at The Yale School of Management
that banks are permitted to hedge the specific risks they face and continue underwriting and
market-making activities on behalf of their customers. (Zeissler, Metrick, 2014). As a result,
a difficulty in fully applying the ban is revealed that questions the effectiveness of this
regulation. Therefore, this paper provides an analysis of both regulations’ effectiveness by
putting them in comparison.
On the other side, The High Level Expert Group proposed a Mandatory Separation of the
entities, consisting of a two-stage test (Gambacorta, Rixtel, 2013). The first stage would
assess if a bank’s assets held for trading and available for sale exceed 15-25 % of its total
assets or €100 billion. Continuing to stage 2, the significance of the activities to be separated
has to be compared to a threshold set by the EU Commission in regard to the share of assets
to be separated as a proportion of the bank’s total balance sheet. However, both entities
would remain part of the same banking group. Therefore, according to Gambacorta and
Rixtel (2013), a holding company would have to own both the Trading Entity and the Deposit
Bank. (Gambacorta, Rixtel, 2013). This Mandatory Separation plan also helps in defining the
scope of the regulation, further criticised by experts in the field as only targeting the big
financial institutions in Europe that count for a small share of the entire banking industry, as
opposed to the Volcker Rule that covers all of the banking institutions.
The OECD also criticised the initial Liikanen Proposal as being concerned on choosing the
wrong threshold for separation assessment and therefore targeting only large banks as
opposed to the Volcker Rule’s scope of the entire industry (OECD, 2013).
The differences between the American and European rules are presented by Deloitte in their
report on the EU banking structural reform, arguing that “the scope of the European rules is
limited to the banking entities identified as Global Systemically Important Institutions”. On
the other side, the report also states that the Volcker Rule applies to all banking entities
operating in the US, irrespective of size. (Deloitte, 2013).
In comparison, the scope of the EU proposal is presented in PwC’s study on the impact of
bank structural reform. The scope is defined by “EU banks and their parents based in the EU,
including subsidiaries and branches wherever they are located.” (PwC, 2013). In short, the
EU regulation targets global systemically-important banks and credit institutions that possess
more than €30 billion in total assets that also possess total trading assets and liabilities
exceeding €70 billion or 10% of their total assets (PwC, 2013).
Moving forward to discussing the scope of the Volcker Rule, Arbit et al. (2014) presents the
fact that “the Volcker Rule does not apply to entities whose contacts with the United States
do not require licensed agencies or branches. For example, foreign banks that maintain only
representative offices in the United States are not subject to the Volcker Rule” (Arbit et al,
2014)

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In conclusion, the proprietary trading regulatory implementations in the EU and US differ
substantially, leading to different banking environments and therefore a reshaped global
banking industry.
Considering that the European Union’s regulatory authority also includes national regulators,
the European Commission states that “a derogation may be granted from separation of
trading activities to individual banks that are already subject to equivalent measures in
another Member State” (European Commission, 2012). It also states in the report of the
Structural measures to improve resilience of the EU credit institutions that “the national
legislation must be the same as those set out in this draft regulation” (European Commission,
2012).
The funding of the separate institutions has also been approached in the academic papers.
Krahnen, J. (2013) presented the solution for both institutions by stating the universal bank
will be refinanced as before by deposits, bonds and unsecured credit, while the trading house
will have its own funding, most probably from bond or inter-bank wholesale markets.
(Krahnen, 2013).
In addition, he argues that “refinancing of both units must be separate” and that “the trading
banks and commercial banks should each provide their own capital and… be confronted by
the market with their own respective risk costs” (Krahnen, 2013). This represents a viable
solution for the transition period and the European banking structural reform implementation.
In summary, the processes that together form the clear path of how the regulation achieves a
safer financial system strongly, leading to the dilemma addressed in this paper supported by
the uncertainty of which approach will prove more viable for banking institutions.
2.3 Banking institutions’ compliance
The existing literature on the banking institutions’ compliance to the two structural reforms
presents several valuable points on the benefits and drawbacks of the implementation
processes.
To start with, a description on the banking structural reform impact in Europe by PwC
states that the groups….must ensure legal, economic, governance and operational separation
between the markets entity…and the core credit institution” (PwC, 2014)
In an article in Der Spiegel, Kaiser, S. (2012) presents the fact that the Liikanen
proposal would affect Deutsche Bank as it holds €240 million in securities for own-account
trading at the time (Kaiser, 2012). It is further presented that the separation could be very
expensive for the big banks as they would have to pay for higher interest rates for investors’
credit, leading to many banking operations’ reduced profitability (Kaiser, 2012).
Furthermore, Rabobank presents in a report that approximately 20 European universal
banks would be required to separate following the Liikanen proposals. Also, the paper also
argues that the trading services will be more expensive due to separation costs and less
liquidity (Rabobank, 2012).
In short, the structural proposal would clearly bring higher costs and reduced
profitability in the European banking sector.
The report on the impact of bank structural reform in Europe presented by PwC states
that many large banks have exited or scaled down their proprietary trading operations,
especially the large American banks that are subject to Volcker Rule, such as Citigroup,

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Morgan Stanley or Goldman Sachs (PwC, 2014). The report also mentions that HSBC, Credit
Suisse and Deutsche Bank have exited entirely from these activities (PwC, 2014). Further
considering the US regulation, JPMorgan CFO Marianne Lake also stated in an interview for
The Street that the firm has reshaped its business to comply with the rule (Lake, 2015).
Going further, one Goldman Sachs presentation argues that “there are direct costs, including
compliance and back-office operations that have expanded significantly to address new rules,
including the Volcker Rule” (Goldman Sachs, 2014). In short, even though the banks face
substantially higher costs to the rule, they followed the certain established path for full
compliance by July 21, 2015.
Therefore, as the big financial institutions have complied already with banning proprietary
trading, it is interesting to assess which of the implementation approaches leads to better
profitability for the banks in the long term.
Additionally, King et al. (2013) was stating in 2013 that “the United States’ banks
have…spent millions of dollars to water down the Volcker Rule, which they view as an
excessive restriction on a major source of profitability.” (King et al., 2013). It is therefore
clear that the regulatory movement impacted the US banks through compliance costs on the
short-term and a reduced profitability on the long term. However, finding which regulation
had a higher impact on these two metrics was uncertain. Therefore, this paper fills the gap
and considers these factors in the final comparison.
In an interview for Financier Worldwide, Jackson, C. (2015) states that the banks have been
gathering…data and conducting…analyses, building systems to interpret the data and
monitor compliance with the Volcker Rule (Jackson, 2015). She further continues that “the
banks are developing internal controls…implementing independent auditing
functions…training employees”. In summary, regulatory compliance has majorly challenged
the institutions’ business models and processes, further taken into consideration in the
regulatory comparison.
Lastly, according to Gandhi and Kiefer (2013) the foreign banks were considering being
forced to fire or relocate US employees involved in proprietary trading (Gandhi, Kiefer,
2013). They also argue that “the most significant issue with the ‘solely outside US’
exemption’ is that it places domestic banks at a disadvantage to foreign rivals that are not
subject to the same restrictions in their home countries” (Gandhi, Kiefer, 2013). It is therefore
appealing to study how this will shape the US banks’ competitiveness and whether the
regulatory differences in EU and US will lead to global banks’ activity migration towards
Europe.
In summary, the different regulatory approaches and different compliance requirements have
significant impacts on the banking business models and profitability, impacting banking
competitiveness and geographical activity focus.

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2.4 Regulatory developments’ criticism
This section presents academic and industry criticism faced by both regulations, questioning
the regulatory purpose, implementation and effects on banking institutions. Further
development of the issue is to be found in Appendix A.
2.5 Banking institutions’ profitability
By approaching the effects of the regulatory pieces on the banks’ profitability, the existing
literature presents the certain figures of trading revenue in comparison with how will the
implementation processes and the final rules affect the industry and institutions’ profitability.
The subject is covered in depth in Appendix B.
In summary, the literature reviewed above illustrates current gaps in the research considering
the banking institutions’ viability regarding the recent proprietary trading regulations. This
dissertation aims to complete the gaps and compare the two regulatory pieces from an
institutional point of view, as presented in chapter 3

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3.0 Research methodology and design
This chapter describes the research methodologies and design used for the data collection and
analysis processes relevant for answering the main research question.
3.1 Research philosophy
To start with, the research philosophy adopted for this paper is pragmatism. Hammond and
Wellington state that a pragmatic approach is one which takes a practical orientation to a
problem and finds a solution that is fit for a particular context (Hammond, Wellington, 2013).
Considering the scope of a pragmatist approach, Saunders et al (2013) affirm that the
pragmatist view supports that both observable phenomena and subjective meanings can
provide acceptable knowledge and that the conducted research integrates different
perspectives to help interpret the data (Saunders et al, 2013).
Therefore, the pragmatist approach was chosen accordingly to the suitability of the
research philosophy with the ontological, epistemological, axiological and data collection
characteristics of this study. It was considered the most efficient philosophy in comparing the
two regulations, considering the points presented above.
The dissertation’s collected data fits with the pragmatist’s data criteria as the data is
qualitative and the methods used are semi-structured interviews. The research study presents
an inductive approach together with an objectivist ontology. The inductive characteristic is
supported by the lack of a defined hypothesis assuming a better banking environment.
Lastly, the conclusions were drawn after data has been collected, building a theory
that supports the superiority of one banking regulatory environment from a proprietary
trading perspective.
3.2 Research approach
Using an inductive approach for this paper presents both advantages and disadvantages.
First, an inductive reasoning is more suitable for situations where information is not
significantly developed, being also the case of this paper due to the regulatory developments’
freshness.
In addition, the collected data aligns with the inductive approach, as this choice
provides a favourable way for qualitative data analysis. Also, Saunders et al. state that the
inductive approach gives the chance for more explanation of what is going on (Saunders et al,
2013). This is also the dissertation’s case, as the paper requires a thorough understanding of
the banking regulation’s technical aspects.
However, it is hard to define an adequate number of observations before a general
conclusion can be reached. Nevertheless, this approach is the most suitable for the research
project due to the recent appearance of the regulatory developments.

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3.3 Research purpose
The dissertation project’s purpose is best categorized as exploratory and descriptive.
Robson described an exploratory study as a valuable means of finding out what is happening
(Robson, 2002).
Also, the objective of a descriptive study is presented by Robson as “to portray an
accurate profile of persons, events or situations.” (Robson, 2002). Therefore, these terms best
describe the research purpose, represented by finding out what is happening with the two
proprietary trading latest regulations and portraying a clear picture of the superiority of one
regulatory environment.
3.4 Research ontology
The ontological perspective adopted is objectivism, defined by Bryman as a position
that asserts that social phenomena and their meanings have an existence that is independent
of social actors (Bryman, 2003).
Adopting an objectivist perspective also presents a key advantage: the collected data
is less prone to bias and easier to be analysed. By contrast, this view ignores the possible
actions of key decision makers of these regulations.
Objectivism is adopted as the research paper addresses the state of the banking
institutions as business entities, excluding their employees’ actions. The research direction is
headed towards the view that regulations will affect institutions irrespective of the banks’
representatives.
3.5 Research methodology
Qualitative research for gathering primary data is considered the most appropriate for
this dissertation topic. Walliman and Nicholas affirm that “qualitative data cannot be
accurately measured and counted, and are generally expressed in words rather than
numbers”(Walliman, Nicholas, 2013).
Considering that this represents one of the first papers on the topic, the lack of
forecasted figures and of feasibility of the data issued by the banking institutions for this
study, qualitative research is considered the most suitable approach, helping the researcher
get valuable viewpoints from key experts in the field. The lower difficulty of qualitative data
analysis is also an advantage, making the process less time-consuming.
By contrast, a quantitative data collection technique would not fit the dissertation
context, as quantitative analysis would involve a large probability of errors and bias due to
financial reporting complexity and to the diversity of factors influencing the data.

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3.6 Mono method
A mono method approach was chosen, represented by the semi-structured interviews
taken to experts from the academia, regulatory bodies, central banking and investment
banking industry sides.
As the interviews provide different perspectives on the regulatory measures, the ease
of interpreting the data represents a major advantage. The diversity of the experts’ views is
also an advantage as it puts into balance the key benefits and issues presented by the
participants. Also, there is a higher probability of achieving a consistent set of findings, due
to the lack of multiple analysis procedures. Therefore, the mono method approach was
considered the most appropriate for this research study.
3.7 Semi-structured interviews
According to Longhurst, R. (2003), a semi-structured interview is a verbal interchange
where…the interviewer attempts to elicit information from another person by asking
questions (Longhurst, R., 2003).
The interview sample contains open-ended questions related to the topic, formulated
to prevent biased answers and to encourage elaborated answers. More to be seen in Appendix
E.
The interviews were recorded using the QuickTime player and the Voice Memos
iPhone application. They were then transcribed to ensure future thorough analysis of the
respondents’ answers.
It is important to mention that the majority of interviews were conducted over the
telephone and through the Skype online tool.
The semi-structured interviews data collection period started with the opportunity of
getting the views of one investment bank’s employee. The recorded interview was listened to
check for any unclear question formulation or unclear explanations, providing a good
improvement opportunity for future interviews.
Going further, a small set of threats could damage the findings of this dissertation.
The risk of lacking data reliability usually increases with the number of inexperienced
respondents. This risk was prevented by participants as they only gave fully documented
views and avoided untrustworthy answers.
Additionally, the impersonality faced over telephone and Skype interviews was
another threat. This issue was diminished by ensuring a good rapport before interviews
through consistent correspondence.
While conducting interviews, problems of connectivity were also avoided by having
internet connectivity and telephone signal alternatives.
Lastly, the threat of altering data through the research process was avoided as the
recording process was adapted according to interviewee’s requirements. For example, one
participant felt stressed while the interview was recorded, therefore the recorder was stopped.

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3.8 Qualitative data analysis
Analysing qualitative data represented a wide process that started with transcribing the
interviews and continued with organizing data on specific themes contributing to the
regulations’ comparison. The data was then grouped accordingly to illustrate the factors
leading to the dominance of one regulation over another.
Manual coding was used for the data interpretation process and for determining the main
themes, leading to the main conclusions.
3.9 Time horizons
As the scope of the dissertation includes a five-year point after the regulatory measures’
implementation, the time horizon is cross-sectional.
3.10 Research ethics
Interviewees were asked for their identity anonymity or disclosure possibility. Anonymity
was kept to protect participants from reputation damage due to possible wrong data
interpretation.
The participants were also asked for permission for the interviews’ recording process and
were informed of the data collection process.
Once data was collected, it was only used for dissertation completion purposes. Lastly, data
will not be distorted or deteriorated in any way, ensuring a reliable dissertation execution.
3.11 Reflections on research methods
 Participants feared to fully disclose their opinions on various matters as it could
damage their reputation in case of inappropriate data analysis.
 This topic needs a bigger time frame for a detailed comparison of the European
and American regulations.
 The lack of one interviewee’s time availability led to shorter responses, having a
significant impact on the data collection process.
 The paper’s validity is threatened by obsolescence due to possible regulatory
changes.

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4.0 Empirical findings
This chapter presents the results of the primary data research methods described in the
previous section and a detailed analysis of the key findings that draw a comparison between
the European and American proprietary trading regulatory frameworks. A sample of the
interviews is given in Appendix F.
Due to reputation safety measures, the interview participants’ identities were not disclosed.
However, these findings are a result of multiple viewpoints coming from academics, central
banking representatives, compliance officers and former regulatory officers in order to
achieve a multi-faceted approach. As there were 9 respondents, they were named as
Respondent 1, Respondent 2 etc. More to see in Appendix D.
4.1 Purpose similarity
The variety of perspectives provided a greater range of reasons for the regulatory aims but the
findings triggered certain patterns of both regulations’ actual purposes, seen by Respondent 1
and Respondent 2 as having the same goals but a significantly different implementation.
As a highlight, Respondent 1 evidenced a general need for a greater sense of client
protection and a conflict of interest reduction through focusing more on client centricity and
less on the bank’s own trading book. There was a consensus among respondents for
significant cultural change due to the Volcker Rule, favouring the client’s best interest,
leading to better conduct and future crisis prevention.
Going further, Respondent 3 defined both regulatory purposes as addressing the too-
big-to-fail problem by restricting these activities and banking restructuring, as also stated by
the Securities and Exchange Commission and the European Commission and presented in the
Literature Review chapter.
In comparison, three participants characterized the measures as answers to the public request,
supported by a political implementation easiness. One interesting point was that there was a
lack of certain data illustrating that proprietary trading was a large part of the crisis,
Respondent 3 further describing Volcker Rule as not being an optimal regulation.
Another detailed purposes’ definition was given by Respondent 8, describing both
regulatory developments as impression management measures of risky activities separation
and retail banking protection, intending to make the public feel safe and suggesting that
taxpayer money will not be used in bailing out big financial institutions anymore. Respondent
8 further described Volcker Rule as a conflict of interest management measure with the
purpose of implementing a better culture and a better conduct for the key banking
institutions.
Lastly, a central banking representative stated that both structural reform and the Volcker
Rule were intended to match the general public wishes for more and better regulation that led
to a banking restructuring need and the purpose of deficiencies improvement.

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Hence the research results presented above, it can be seen that both regulations’ main
purposes were similar, implying a general risk reduction presented by the banking institutions
to the taxpayers and a significant banking services’ reshape in terms of culture and conduct.
Even though the measures differ in implementation, there is a common goal of achieving
better banking services’ stability, supervision and efficiency and re-establishing taxpayers’
trust in both the EU and US. Therefore, it is clear that a high purpose correlation exists
between the two regulations.
4.2 Regulatory effects
This section presents the regulatory developments’ effects on banking institutions and draws
a comparison between the structural reform and the Volcker Rule considering the factors
presented below.
4.2.1 High risk diversity
One of the main research aims was to find a comparison between the two regulations with
regards to risk factors faced and brought by the institutions to draw a reliable conclusion of
the general comparison. It is assumed that global banks will see an environment as more
favourable where they can increase their activities’ risk and face the minimal threats affecting
their services.
First, the Volcker Rule has been characterized by Respondent 1 as having continuous
operational and technology risks due to difficulties in distinguishing between risk
management and proprietary trading. Additionally, Respondent 2 commented on the fact that
regulators are unable to track risk levels as banks are more eager to diversify their risk in the
US by increasing shadow banking activities, a fact supported also by Respondent 7 and stated
in the Critical Literature Review. However, this uncertainty led to a limitation of market
making activities for US banks and therefore reduced liquidity as a consequence of the
regulators’ severity, as stated by Respondent 2.The latter also added that Volcker Rule led to
less transparency and no changes in the risky banking activities. On the other side, a point
presented in the Critical Literature Review was that the structural reform will bring more
transparency to the stakeholders (Gambacorta & Rixtel, 2013). Even though this could be
seen as an advantage in the US, misconduct consequences could deteriorate client trust and
lead to an image of banking services’ reduced value.
Additionally, Respondents 5 and 7 commented on institutions’ internal risks, such as talent
loss and personnel migration into other business lines. Lastly, the Volcker Rule was
perceived by Respondent 7 as facing very high public expectations implying that banks will
always be safe in the future, leading to a bigger pressure for these institutions during the next
economic difficulties, as opposed to the structural reform, which may give the public increase
of hope for better services, enhancing their trust.
By contrast, EU institutions are facing different scale and type of risks, as Respondent 2
stated that European banks are in a good position to leverage more and therefore increase the
volume of risky activities, as the separation will allow them to do so, fact supported also by
Respondent 5. Therefore, as Respondent 6 argued, it is possible to see a future increase in
retail banking risky activities, as well as a further increase in investment banking activities

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due to the less restrictions in the EU. Chen, H. also signalled that a lack of robust regulation
could bring additional risky activities in the sector (Chen, 2015), as presented in the Critical
Literature Review. This opportunity allows European banking institutions to gain a
competitive edge and boost their profits.
Additionally, both Respondents 3 and 6 stated that there is a need for business model multi-
diversity, whereas Respondent 6 added that there is an increased risk in the EU of lacking in-
house financial buffers during crises moments and therefore an increasing uncertainty of
these institutions’ safety, as opposed to one central banking representative’s argument that a
better regulation will assure better financial buffers for banking institutions during economic
turmoil.
The business model complexity in the EU has also determined Respondent 3 to signal the
litigation risks that European banks could confront with. Also, the European banks face the
threat of bad law making practices and regulation drafting that could raise additional issues
and risks.
Furthermore, the complexity can be seen in EU regulation too due to an increasing volume of
measures that will make banks harder to be supervised to be in line with regulatory
developments, as supported by Respondents 1 and 3 and presented in the Critical Literature
Review. This could further lead to a loss of competitiveness as more attention has to be given
to regulatory developments, as well as a reduced trust in the institutions’ ethical standards
because of the new, unregulated activities.
The findings presented above are further considered into an analysis in order to illustrate the
advantages of one approach over the other in terms of threats faced and permitted risk levels.
First, Respondent 1 signalled the pre-hedging process conducted by banks and the inability to
distinguish proprietary trading from risk management leading to higher misconduct chances
and therefore higher regulatory penalties chances. On the other hand, the EU banking
institutions have the opportunity to increase risky activities while fully complying and
therefore reducing regulatory fines chances. European banks also have the opportunity to
leverage on retail banking activities due to the higher consumer trust in the EU, as presented
by Respondent 7.
In addition, the implementation techniques and timeline in Europe allows regulators to reduce
bad law practices possibility and to fix requirements ensuring an efficient environment. Also,
the US banks’ inability to focus activities in Europe and profit from the separation due to the
Volcker Rule’s legal structure and scope could be favourable for EU. Conversely, this
approach differences could mean a further talent loss for US banks, as key performers would
move to the structure that allows them to get greater compensation. This implies a loss of
services’ value, as this will be shifted towards other industry parts together with the key
performers.
After conducting a further analysis of the research results, it can be seen that the American
environment will be less favourable for banking institutions in the longer term, due to
increased level of threats and their decreased ability to increase risk while being fully
compliant.

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4.2.2 Cost comparison
In assessing the viability of the European and American environments for banking
institutions, costs faced by the banks following the regulatory developments have also been
considered.
First, some respondents believed that US institutions face higher costs due to less flexibility
and bigger difficulty to bypass the Volcker Rule, as stated by Respondents 2 and 3.
Additionally, one compliance officer said that the Volcker Rule brought higher costs than
structural reform will as there was a need to create a separate compliance framework and that
his employer has already separated banking entities, resulting in minimal costs for structural
reform compliance.
On a further note, Respondent 2 also argued that Volcker Rule is more binding than the
structural reform and that the US institutions were relying more on proprietary trading.
Therefore, costs should be higher and profits should have had a bigger drop in the US.
By contrast, the other respondents claimed that structural reform should be more costly, as
supported by Respondents 4, 5 and 7. Others also stated that even if Volcker Rule will erode
profitability, it will not lead to an entire restructuring. There was also a belief that structural
reform will result in higher consulting costs, whereas for the Volcker Rule case, shutting
down proprietary trading will be less disruptive and less costly. Respondent 7 also criticized
the structural reform questioning the proportionality between the costs and benefits, as
mentioned also in the Literature Review. The participant further argued that these high
expenses may lead to key players’ exit of business.
By drawing a comparison, there is a trend towards inferring that the structural reform
presents higher costs. However, it is very important to note that the compared costs reflect a
short time period. Therefore, even though the structural reform presents higher
implementation costs, the impact will not affect trading profitability over the long term. This
could also imply a loss of competitiveness for EU institutions over the short-term. On the
other side, the inability to go back to the previous state in the US and allow proprietary
trading may have bigger consequences in the future.
In conclusion, the costs incurred by the US institutions may be higher than in the EU over the
long term, affecting profitability on a bigger scale, whereas the European structural reform is
perceived to bring higher costs for institutions over the short term.

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4.2.3 Regulatory misunderstanding consequences
The research process led to finding a major issue faced by institutions in both Europe and the
United States: the lack of regulators’ understanding of the consequences their measures
create. To be able to draw a clear difference between costs incurred in the EU and in US,
there was a need to identify the factors leading to these additional costs for both regions.
While the Volcker Rule has imposed customised compliance programs in the US, the
European regulators still need to create such frameworks, facts also stated in the Literature
Review. Respondent 7 argued that there is a major efficiency loss for both sides due to
regulatory decisions, as clients cannot access the same services. This lack of understanding
was also supported by one compliance officer stating that regulatory high requirements are
increasing the risk that leading banks to get out of certain businesses rather than comply with
the measures, leading to an increased competitiveness for small and medium financial
institutions.
There was a clearer view on the European regulatory problems, one participant raising the
timing issue, as there are national regulators in Europe already imposing measures, whereas
European level plans will not be implemented by 2019. This uncertainty raises the possibility
of additional costs in Europe due to possible plan changes by 2019. Additionally,
Respondent 6 signalled the wider range of different concurrent legislative interventions in the
banking business, making it more difficult for companies to reach full compliance and
increasing compliance costs. The participant also stated that there is an increased difficulty in
becoming fully aware and fully compliant with the EU regulatory developments.
Moreover, a central bank representative mentioned the increased possibility of
regulatory arbitrage in the EU due to this increased regulatory volume, as opposed to a clear
general regulatory agenda presented in the US.
After analysing the findings above, it is clear that the European regulatory attitude
could bring a balance into proprietary trading costs’ comparison over the long term.
However, the big regulatory volume in the EU is likely to decrease once regulatory
integration is achieved. Also, the difficulty of being fully aware of regulation in the EU
makes the overall regulatory environment more favourable for US. This increasing problem
may also prove damaging for the offered services’ value, as it would bring confusion to
banking representatives. Going further, the regulatory arbitrage could prove an opportunity
for European institutions but penalties might be in accordance with these opportunities’
exploitation.
Last but not least, the consequences arising due to the lack of regulators’
understanding of the industry needs will be worse in the European Union. However, time
differences between the two initiatives could have a significant impact on this paper’s results,
depending on the European regulatory bodies’ future decisions.

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4.2.4 Decreased trading revenues
By questioning how regulations impacted trading revenues in both EU and US, a conclusion
was drawn that they decreased in both sides as mentioned by all participants. However, it was
hard to estimate the magnitude differences due to the implementation time delay.
As mentioned by Respondent 2, it is difficult to estimate the regulations’ impact level on the
decline, as there are also other unrelated factors that led to decreased revenues. One
participant stated that the drop may manifest only on the short-term, as these measures will
help institutions avoid major losses in difficult times and therefore maintaining a stable
revenue in both cases. Additionally, an academic signalled that future key revenue drivers
will depend on the institutions’ innovation. However, this is majorly impacted by the Volcker
Rule scope and by the time delay, giving a clear advantage to the European side.
Furthermore, one compliance officer stated that the potential risk increase in the separated
entities in EU will boost trading revenues over the long-term. On the other side, Respondent
7 argued that trading revenues were affected depending on institutions’ reliance on these
activities as presented also in the Critical Literature Review. An important point made by
Respondent 7 was that US banks were perceived as more engaged in proprietary trading.
Even though it is hard to compare the magnitude of trading revenues decline, there is a
convincing conclusion that both systems were significantly affected by regulation. The
assumption that US banks were more involved in proprietary trading leads to the idea that the
regulations had a bigger impact on the American institutions. Also, it can be stated that due to
the Volcker Rule’s stricter characteristics, a lower innovation level may lead to revenue
sources’ lower diversity in US compared to Europe. The potential risk increase allowance in
Europe will boost trading revenues in the future, making the European environment more
favourable from a trading perspective and enhancing the European institutions’
competitiveness.
4.2.5 Long-term ineffectiveness
Assuming that effects are clearly defined, a current dilemma is whether these regulatory
developments are effective while trying to achieve their goals over the long term. Both
Volcker Rule and the banking structural reform have been majorly criticised by every source
and hence every part of the industry.
First, one respondent characterised both reforms as being currently effective but stressed that
a path to avoidance will be found in the future. Additionally, one US compliance officer
described the existing problems of the pre-hedging process done by investment banks (e.g.
buying a financial product before a client order request and missing the client order) and the
difficulty of differentiating between risk management (i.e. hedging versus speculation) and
proprietary trading, as everything can easily derive into big conflicts of interests, questioning
the value of the offered financial services.
From a cultural change viewpoint, both the Volcker Rule and the structural reform were seen
as effective, even though one respondent considered the regulators are ‘going too far’ leading
to reduced business volume but a safer environment. By contrast, others identified a lack of
effectiveness, justified by the possibility of both European and American banks to shift risk

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towards unregulated areas. Going further, key academics insisted that neither Volcker Rule
nor the structural reform are making banks safer, adding that retail banking could also present
high risk. However, the structural reform was perceived as having one major benefit: an
orderly resolution of the banking groups during economic turmoil, leading to increased
competitive advantage for European institutions.
The interviews also revealed beliefs that there are no long-term benefits of these regulations,
considering the cross-infection issues and the certainty that a future path to avoidance will be
found. Respondent 2 also built on the inefficiency of the Volcker Rule, stating that simply
banning these activities is very inefficient as it would be more difficult to return to the
previous state.
On the other side, some participants believed in an effectiveness from the depositor point of
view, as the regulations led to better conduct and client treatment.
Lastly, Respondent 4 believed in both sides’ effectiveness, stating that the regulatory
inefficiency problem will not persist in the long term, as these implementations will lead to
avoidance of huge losses in a future crisis and will justify the cost and risk reduction
requirements.
After reviewing the regulatory effectiveness research results, it is fair to assume that a way of
avoiding the Volcker Rule has already been found due to the lack of ability to distinguish
between pre-hedging and actual proprietary trading. Therefore, the Volcker Rule failed to
achieve full effectiveness.
On the other side, questioning the structural reform efficiency led to an idea of higher risk in
both separated entities, as there will be a less strict regulation for investment banking risky
activities and an increased risk appetite on the retail banking side due to the need of
maintaining high revenues, possibly leading to bad client treatment and deteriorated financial
services’ value.
As professionals perceive Volcker Rule as not optimal, putting together beliefs that both
measures were just an answer to the public request and that participants believed in efficiency
from the depositor’s viewpoint, it is clear that regulators achieved public satisfaction on both
sides but didn’t achieve full effectiveness and a safer environment in the United States. Also,
the structural reform effectiveness has been majorly criticised by Barclays, as stated in the
Literature Review.
Some participants also presented an ineffectiveness viewpoint, supported by Respondents 7
and 8 through the fact that retail banking activities such as consumer lending or SME
financing can be as risky for the general good as investment banking activities, therefore
failing to make the system safer.
Considering the participants’ views, a conclusion is reached implying that long-term risk
mitigation effects are compromised for both systems as in the US, banking institutions can
find new ways of spreading risk towards other revenue sources such as shadow banking
whereas in the EU, the separated entities can just increase risk to satisfactory levels.

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Therefore, by, putting in comparison the two regulatory developments, the Volcker Rule
presents a lower effectiveness than the structural reform, as well as reduced efficiency in
achieving its goals over the long term.
4.3 Regulatory impact
After reviewing these regulations’ general implications, it is important to conclude how
banking institutions respond to these regulatory effects and how they restructure to adapt and
maintain their profitability and competitiveness at the highest standards.
4.3.1 Business model impact
The two regulatory pieces bring with them significant challenges for banks, especially for
their trading divisions. In assessing which environment is more favourable, it is important to
assess which regulation will challenge banks’ business model in a less disruptive way.
4.3.1.1 Trading departments’ challenges
To start with, one expert in the field stated that both developments bring higher costs of
capital, higher borrowing rates and the need for banks to rethink the trading models. By
further making a comparison, Respondent 2 commented on the banks’ requirements for
continuing revenue generation through trading activities, stating that banks need major
investments in technology and research to maintain a competitive edge in the trading
business, fact justified by the banking leaders and mentioned in the Critical Literature
Review.
On a further note, one academic mentioned an increased difficulty in achieving full Volcker
Rule compliance due to the many exceptions and uncertain points presented in the regulatory
act. In addition, Respondent 2 added that institutions might shift their focus towards
traditional banking due to these difficulties in US, leading to new business model shapes.
Also, one key academic argued that shutting down proprietary trading in US was perceived as
affecting other banking divisions and therefore having a significant business impact.
On the European side, Respondent 4 mentioned an increasing difficulty faced by banking
institutions to fully comply with structural reforms while dividing the bank and still maintain
an efficient banking model.
After analysing the findings presented above, it can be seen that the Volcker Rule has faced
more criticism from the respondents, even though both regulations brought major challenges
for the banks. There is a tendency to believe that US institutions will need bigger technology
and research investments due to the difficulties in distinguishing between proprietary trading
and pre-hedging and due other regulatory uncertainties. The perception that the regulation
might affect other divisions cannot be true for the European side, as the structural reform will
not encourage risk migration towards other business parts but an increased risk level in the
same divisions due to less restrictions.
In summary, while the European institutions face major difficulties from a compliance and
business model perspective, the Volcker Rule is perceived to be more challenging for trading
divisions.

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4.3.1.2 Business model significant changes
By questioning interviewees on the regulations’ impact on the banking business models, there
was a wider variety of answers, touching on very different perspectives.
First, one US compliance officer mentioned that there is a visible cultural shift happening in
banking institutions that started a few years before the Volcker Rule full implementation,
leading to more client centricity and better conduct. Additionally, one EU compliance officer
stated that the US regulation didn’t imply a big change from a structural point of view, but
led to more testing and documentation for his employer.
Also, some participants argued that big institutions will comply with both while focusing
activities on the more favourable location, as elaborated further in the chapter. However,
Volcker Rule was seen as presenting less internal integration and a reduced service offering
than before affecting the institutions’ business model.
While the proprietary trading ban can be avoided, the structural reform requirements cannot,
as pointed by Respondent 4. He further argued that the structural reform imposes bigger
business model changes. His arguments are also supported by Respondent 5, stating that high
levels of internal restructuring and departmental, geographical and management changes are
needed. Additionally, one academic states that the EU regulation is more disruptive than
Volcker Rule as it requires thinking about the entire group and how to best restructure it. This
is also completed by Respondent 6 that signals the universal banking model disappearance in
Europe.
These regulatory changes also bring secondary effects affecting the business. As stated by
Respondent 2, both the US and EU bodies are putting more emphasis on some services while
leaving other areas unregulated. This leads to the appearance of new profitable activities that
may not be in line with regulatory aims, as stated by Respondent 3. In addition, Respondent 7
mentioned a big unpredictability for the EU banking business model as banks will change
strategies, reshaping the industry. On the other side, members of academia believed a
tendency of talent migration towards hedge funds in the US, this also having an implication
for the bank’s business activity focus.
As it can be seen from the findings above, the structural reform presents a higher impact on
the banking business model, making the US environment more favourable on the short-term,
while EU banking groups have to face significant restructuring. However, this business
model disruption can prove more efficient over the long-term as it still allows proprietary
trading, encourages public trust and allows increased risk levels.

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4.3.1.3 Banking activity concentration shift
A few respondents mentioned the possibility of banks to change their activity focus towards
the more favourable environment.
Respondent 5 stated that American banks are more affected due to the Volcker Rule’s scope,
as opposed to the effect on EU institutions that depends on their number of US trading
counterparties. On the other side, the structural reform’s scope in the EU mainly affects
European institutions.
Therefore, the presence will be impacted depending on the two environments’ regulatory
differences, as stated by Respondent 1. Furthermore, Respondent 2 mentioned that global
banks could shift more activities from US to Europe while implying high legal requirements.
Additionally, Respondent 4 also argued that global banks may concentrate their activities on
the environment with better opportunities. He further completed that the structural reform
will bring a better protocol arrangement for the financial institutions during crises, ensuring a
safer environment.
Considering the interviewee’s answers, a conclusion can be drawn that the American
regulation imposed a tougher environment for global institutions that have now the
opportunity to shift activities towards the EU if they meet legal requirements.
4.3.2 Increased competitiveness
This section presents the results related to the regulatory influences towards the banking
institutions’ competitiveness. A comparison is also drawn between the European and
American regulations in order to reach the research project’s main conclusion.
4.3.2.1 Increased value of financial services
The offered financial services’ value is a key metric in assessing the banking institutions’
client relationships opportunities. It is assumed that better financial services’ value leads to
better client relationships and therefore increased profitability.
The research results provided different views, seen by the researcher as a result of the current
uncertainty provoked by the implementation time differences. It is assumed that better client
relationship opportunities will be more favourable for the banking business, as it will lead to
more profitable activities. Further details of how the two regulations have impacted the value
of financial services can be found in Appendix C.

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4.3.2.2 Mixed competitive advantage
This research project also offers a comparison between the regulatory influences on the
banking institutions’ competitive advantages.
For example, Respondent 1 stated that US banks will be held at the same standard and that
potential differences in regulatory severity will enhance competitive edge. This is similar to
Respondent 4’s argument that banks under a less strict environment will gain competitive
advantage and benefit from better opportunities. Another interesting point was made by
Respondent 6, mentioning that competitive advantage will depend on the banks’ reactions to
regulatory packages and on the innovation level in replacing revenue sources. On the other
side, Respondent 1 suggested that there is not much of competition regress due to the
regulations’ purpose similarity.
Another interesting point was given by Respondents 3 and 5, stating that both regulations
provide small and medium banks a big opportunity for gaining market share, fact also
mentioned by the European Commission and stated in the Critical Literature Review. Also,
Respondent 7 mentioned the regulatory effect of preventing big banks from becoming
oligopolies. On the other hand, one academic believed that the regulatory impact in the US
will be stronger than in the EU and therefore it will affect institutions’ competitiveness more
at a global level.
The findings presented above illustrate opinions ranging from the fact that there is a little
impact on competitiveness to a statement that the impact will be worse for the American
system. Therefore, it is difficult to reach a final conclusion on which environment is likely to
bring banking institutions a higher competitive advantage. However, by considering the
argument that small and medium banks may gain market share following these regulatory
decisions, it is important to note that the structural reform has faced major criticism due to its
scope. According to the European Commission, the regulation is targeting only too-big-to-fail
institution (European Commission, 2014). Therefore, the impact on the market share is likely
to be bigger in the European Union, compared to the Volcker Rule’s scope of targeting
banking institutions irrespective of size. Therefore, global banks’ competitiveness is likely to
be affected worse in the EU.

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4.4 Structural reform dominance
Finally, interview participants were asked about their view on which regulation will be more
advantageous for the global systemically important institutions after full implementation.
First, Respondent 2 believed that the structural reform will prove more beneficial than the
Volcker Rule, having a better impact than the American regulation due to a better
implementation process while describing the US act as a very drastic decision.
Respondent 5’s viewpoint was also that the EU regulation will be more opportune for
banking institutions, while Respondent 3 mentioned that structural reform will lead to a safer
banking environment. She also argued that the European regulation will bring banks better
structures and higher stability than before, leading to bigger advantages for the EU banking
system.
On the other side, Respondent 7 had an opposite opinion, supporting the idea that the US
regulation will be better for banking institutions when compared to the European banking
structural reform. She believed that the Volcker Rule is less disruptive than the European
regulation, mentioning that the universal banking model is still present in the US while
disappearing in EU due to the regulatory developments.
In summary, the respondents’ answers presented two opposing viewpoints: Respondents 2, 4
and 5 believed that the European regulation will prove more convenient for banking
institutions when compared to the American act. By contrast, Respondent 7 supported the
idea that the Volcker Rule will be better for these institutions due to the fact that it still allows
the universal banking model.
However, there is a clear trend towards the idea that the European banking structural reform
will lead to a more opportune environment, as supported by the majority of the participants
after considering all the points presented above.
Lastly, before taking a final decision on which environment will prove more advantageous
for banking institutions, it is important to conduct a Force Field Analysis to illustrate the
factors that lead to the final conclusion of which regulatory approach is better than the other
one.

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5.0 Conclusions and recommendations
The present paper discussed the following research question: “Which proprietary trading
regulatory approach will prove more advantageous for global systemically important banks
after full implementation?”, while the research objectives included: 1) an examination of
existing literature for a better understanding of the regulatory frameworks 2) a systemic
gathering and an analysis of the valuable viewpoints on the American and European
proprietary trading regulations from all banking industry sides 3) a comparison framework
based on the research results’ major points and 4) a conclusion on the advantages of one
regulatory approach over the other one.
After conducting research on the European banking structural reform and Volcker Rule’s
effects and impact on the industry, a Force Field Analysis has been designed (Figure 1 below)
to illustrate the results and to draw a comparison between factors supporting the European
regulation as more advantageous in contrast with factors presenting the American proprietary
trading ban superiority over the European Proposal for Regulation, based on the data
presented in the previous chapters.
5.1 Force Field Analysis
The European Union has the opportunity to become one of the most efficient and safe
banking systems at a global level. However, the elements mitigating the dominance of the
European environment over the American one presented in the Force Field Analysis, have to
be reduced by the industry practitioners.
For example, the universal banking model disappearance in the EU is a significant challenge
for the European banking business models. Despite this, global banking institutions have the
opportunity to innovate to maintain their market share and their services offering and to
improve client relationships, while being compliant with regulatory requirements.
In addition, the possibility for bad law making practices and bad regulatory drafting, stated by
Respondent 3 and mentioned in the findings chapter can be mitigated by regulators as the
implementation timeline allows for changes and for ensuring a successful implementation
from a legal viewpoint.
Also, the increased volume of regulation and difficulty of full compliance in the EU
mentioned by Respondent 4 can turn into an advantage due to the time allowed by regulators
for full implementation, offering institutions the possibility to ensure high compliance
standards leading to better consumer trust and therefore increased profitability opportunities
over the long-term.

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Figure 1- Force Field Analysis

Page 33 of 50
5.2 Research output
As seen from Figure 1 and answering the research question, the European banking structural
reform approach will be more advantageous for the global banking institutions after
implementation, as supported by the points presented below.
First, despite the purpose similarity of both regulatory acts, the implementation approach
differences make the structural reform more favourable for banks because it still permits
proprietary trading activities and therefore doesn’t prohibit one of the main revenue sources
of these institutions, as it is the case in the US.
Second, European banking will be in a better state as the risky activities’ level will be
allowed to increase as long as it does not affect the taxpayers, leading to increased client trust
from both depositors and institutional clients’ perspective, while boosting revenue. Also, the
banking institutions’ innovation possibilities allowed by the EU regulation encourage finding
appropriate solutions for the lack of future financial buffers problem mentioned by
Respondent 6, ensuring a viable business environment.
Additionally, the regulatory adjustments possibilities in Europe bring an advantage to the
implementation processes. However, these opportunities may materialise in additional
compliance costs, completed by regulatory misunderstanding possibilities and affecting the
image of a viable European environment, forcing banks to focus activities towards an
environment with clearer regulatory requirements.
Furthermore, the lower trading revenue drop in the EU over the long term is another reason to
support the research answer. As proprietary trading activities are still permitted in the EU,
banking institutions are going to be less affected by this regulatory requirement over the long
term because they can maintain proprietary trading as a revenue source and therefore a higher
profitability.
Lastly, despite the short-term business model challenges in Europe, maintaining proprietary
trading activities will lead to global banks’ activity concentration shift as mentioned in the
empirical findings chapter.
Considering all the arguments presented above, the European banking structural reform will
prove more feasible for banking institutions with regard to their long-term profitability when
compared to the American Volcker Rule.
To conclude, this is one of the first papers drawing a comparison between the two
regulations, filling the research gap by putting them in contrast. The regulatory effectiveness
points, the cost and risk effects and the regulations’ business model and competitiveness
impact also contribute to the current body of knowledge.

Page 34 of 50
5.3 Recommendations
There following recommendations could lead to a better efficiency in both the American and
European banking environment.
First, competent authorities need to make regulatory certainty a main priority to avoid future
adjustments, bad law making practices and additional costs for the targeted banking
institutions in the EU. On the other side, re-thinking the proprietary trading ban in the US
could prove a feasible approach if future evidence of US banks’ loss of competitiveness
arises. All in all, both sides need to find ways for ensuring full effectiveness in reaching their
purposes.
On the other side, banks should innovate towards findings ways to maintain their market
share after full regulatory compliance. They should also ensure long term consumer trust and
better services to please regulatory bodies, while looking for new revenue sources.
Lastly, one main recommendation for researchers is to ensure advanced quantitative skills to
be able to forecast certain trading revenue figures or to quantify the regulatory impact to give
a clear overview of these regulatory developments’ influence on the banking institutions.
Lastly, it is recommended to use a bigger data set, including more respondents such as traders
and US Federal Reserve representatives.
5.4 Opportunities and limitations for further research
This research paper has a significant limitation as it ignores the possible scenario that the EU
banking structural reform’s key points may be adjusted by European regulatory bodies. Any
eventual changes may deteriorate the value of this research.
Additionally, the implementation timing is also an issue as the Volcker Rule has already been
fully enacted whereas the European equivalent is still a Proposal for Regulation. Hence, the
amount of knowledge and analysis was bigger on the Volcker Rule side. This could lead to
interviewees’ biased answers and therefore to questioning the validity of this paper.
On the other side, there are research opportunities arising after the timing issue has been
mitigated and after further analysis of the European regulation is conducted. For example,
questioning if these regulations bring more transparency or less transparency to the banking
system would be a research opportunity, as this paper presents a current dilemma in deciding
this factor. Furthermore, it would be interesting to find out how the increased volume of
regulation in the EU will lead to better banking efficiency, as this volume growth has faced
substantial criticism from this paper’s interviewees. The results could lead to a reshape of the
European regulatory agenda and therefore to progress towards a safer banking environment.
Lastly, the effects of the universal banking model’s disappearance in Europe, mentioned also
in this paper, would be another research opportunity, leading to the conclusions of how the
banking system has been restructured in terms of business models and infrastructure after the
regulatory implementations and helping European leaders find new ways to create an
advantageous European banking environment.

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