Why the volcker rule is good

Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The Volcker rule limits two main types of activities by large institutional banks.

Banks are prohibited from engaging in proprietary trading activities and from owning interest in covered funds, generally defined as hedge funds and private equity funds.

The rule is listed in Section of the Dodd-Frank Act , and is part of the larger financial reforms contained in that legislation. The rule was designed to prevent banks that receive federal and taxpayer backing in the form of deposit insurance and other support from engaging in risky trading activities.

The Volcker rule prohibits banks from engaging in proprietary trading activities. Proprietary trading is defined by the rule as a bank serving as a principal of a trading account in buying or selling a financial instrument. The regulations expand on the definition of what qualifies as a trading account and whether the trade involves a financial instrument.

The regulations define a trading account based upon three criteria: a purpose test for the account, the market risk capital rule test and the status test. The rules states that trades are presumed to be for the trading account of a bank if the bank held the position for 60 days. Due to the broad definition of a trading account, certain trading activities are exempted from this prohibition, such as clearing activities, liquidity management, market making, hedging, trades to satisfy delivery obligations and trades through a profit sharing or pension plan of the bank.

However, very strenuous compliance requirements are placed on these trading activities, which include internal controls and extensive documentation. The Volcker rule further prohibits banks from having an ownership interest in a covered fund. The rule defines covered funds with a three-pronged test. A covered fund is exempt from the definition of an investment company as defined by the Investment Company Act of , commodity pools with characteristics similar to hedge funds or private equity funds and foreign covered funds.

The rule sets forth a number of exceptions to these prohibitions, such as foreign public funds, wholly owned subsidiaries and joint ventures. Banks were supposed to liquidate their holdings in covered funds by July However, in December , the Federal Reserve Board granted extensions to banks to get out of these positions until , and until in some cases. The banks argued that many of their positions were in illiquid investments on which they would have to take significant losses to exit. As far as market activity impacts from Volcker, there are many causes of changes in market structure, liquidity and activity, not least of them being the onset of new technology and trading strategies by market participants, as well as behavior changes among investors.

Moreover, it is an urban myth that a lack of proprietary trading has led somehow to reduced market activity and efficiency. Hedge funds have taken up the slack created by the retreat of investment banks from unsafe, exotic trading activity, and they account for massive amounts of market liquidity every day. The ranks of these hedge funds have been filled by traders from investment banks who were looking for more speculative trading environments — and their investors happily take on the risk that their investments entail.

The volatility and increased market activity seen in recent months — not to mention trading desks opening up new products such as cryptocurrency — show that the heart of Wall Street is still vigorously beating. Trading in digital asset futures such as bitcoin have been offered on Wall Street since December , providing new sources of income, Goldman Sachs, for instance, announced some opening moves in its digital assets trading strategy in May The level of trading generally has been up sharply in as volatility returned to the market.

Finally, investment banks have deliberately and successfully pursued more stable sources of revenue since the financial crisis. While regulators may have played a role in this evolution, so have investors. Much of that share increase has come since the introduction of Volcker in , hardly an indication of financial stress and unnecessary bureaucratic burden.

Both the Volcker Rule and Dodd-Frank have been largely protecting banks from their own worst instincts over the past few years. Community Banking. Credit unions. Log In. Follow Us In Real Time twitter facebook linkedin.

Tags Volcker Rule Risk management. By Andrew Waxman June 14, , a. EDT 5 Min Read. They continue to oversee the regulations today. They are:. On December 10, , the commission completed the regulations. As a result, the Volcker Rule has been in force since July 21, On May 30, , the Fed voted to offer banks compliance relief. Securities and Exchange Commission released the final rule modifying the Volcker Rule. It had separated investment banking from commercial banking.

Under Glass-Steagall, investment banks were privately-run, small companies that helped corporations raise capital by going public on the stock market or issuing debt. Commercial banks were safe places for depositors to save their money and gain a little interest. They lent the funds at regulated interest rates. Commercial banks made money despite thin profit margins because they had access to lots and lots of capital in the depositors' funds. Retail banks, like Citi, started trading with derivatives like investment banks.

The repeal of Glass-Steagall meant banks could now put the vast reserves of depositors' funds to work without much regulation to worry about. The FDIC protected commercial bank deposits. Banks could borrow money at a cheaper rate than anyone else. This situation gave the banks with an investment banking arm an unfair competitive advantage over community banks and credit unions.

As a result, big banks bought up smaller ones and became too big to fail. A too-big-to-fail bank will likely need to be bailed out with taxpayer funds too big to fail. That added another benefit. The banks knew the federal government would bail them out if anything went wrong. That's called a moral hazard. If things went well, bank stockholders and managers won. The Volcker Rule impacts you in the following five ways:.

At the time, he was the chair of President Barack Obama's economic advisory panel. When Volcker was Fed Chairman, he courageously raised the fed funds rate to uncomfortable levels to starve double-digit inflation.

Although this helped cause the recession, it was successful. Board of Governors of the Federal Reserve System. CFA Institute. Office of the Comptroller of the Currency. Securities and Exchange Commission.