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Arguments Against The Volcker Rule

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3.3 Volcker Rule
Volcker Rule is a regulatory response which goal is to limit the US commercial banks in trading on their own accounts. The argument is that this limit will help the banks to avoid conflicts of interest while at the same time it will reduce the risk in the banking system. (Law, 2014; “The Fed - Volcker Rule,” n.d.)
However, there are those who are sceptical and critical about the Volcker Rule. First of all, they argue that the Rule tries to eliminate the investment risk in banks while at the same time it does not measure the level of risk or the ability of banks to control it. That would give us an idea on whether the risk is excessive or not. Instead, the main focus of the Rule is the aim of the investment. But, this means that the Volcker Rule will struggle to detect or eliminate any excessive risk. Furthermore, even when it …show more content…

Neil Irwin offers a great example of that. He says that in a supposed scenario that the regulator sees that a bank holds millions of dollars' worth of option that a different currency, will fall relative to dollar. The regulator will think that the bank is speculating that the different currency will fall against the dollar, an action that is prohibited by the Volcker Rule. But the bank holds that options as a security, due to a loan that gave to a foreign company. So, all it does, is to reduce the risk as much as possible. (“Everything you need to know about the Volcker Rule - The Washington Post,” n.d.) The reaction of the Rule to that is to force the banks to provide the regulators with the information about which risks the banks are hedging. But, this would create a vast amount of paperwork for a commercial bank that wants to have an internal hedge fund as well. (“The biggest problem with the Volcker rule - The Washington Post,”

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The Volcker Rule is a federal regulation that prohibits banks from conducting certain investment activities with their own accounts, and limits their ownership of and relationship with hedge funds and private equity funds, also called covered funds. The Volcker Rule’s purpose is to prevent banks from making certain types of speculative investments that contributed to the 2008 financial crisis (Volcker Rule Definition | Investopedia). It was proposed by the economist Paul Volcker. It came about in response to the crash of the financial markets in 2008. It is a part of the Dodd-Frank Act.

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