Barclays (BCS) made $18 billion in the fourth quarter, which by any measure is stunning turnaround considering the problems the big bank had, and shared with most other multinational financial firms just a little over a years ago.

Part of the improvement was due to asset sales, but most came from gains in investment banking.

The improvement mirrors results from that strongest US banks, especially Goldman Sachs (GS) and JPMorgan (JPM). Loan bad debts are still rising, but business with corporate customers and proprietary trading have more than made up for balance sheet weaknesses.

The earnings also point to the damage that the bank “Volcker rule” would do to bank profits. The business of making loans to consumers and small business-classic retail banking–may not recover for several quarters. Write-offs on credit cards and commercial real estate will almost certainly rise. Toxic asset write-offs may continue as the residential real estate market continues to struggle.

Proprietary trading may be a danger to bank balance sheets. Volcker and others appropriately worry that banks which hold customer assets should not leverage those assets to make trades which carry great reward but also great risk. Volcker would severely limit or eliminate this sort or risk.

But, multinational banks cannot afford to lose their proprietary profits. Volcker and his supports may have to make a compromise so that bank shareholders do not see earnings evaporate. The solution may be as simple as setting up an FDIC-like fund to cover trading losses. The cost of the “insurance” for large banks to cover potential trading losses could be in the billions of dollars each year. But, that is probably better for them than the death of their most profitable businesses.

Douglas A. McIntyre

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