Pros And Cons Of Volcker Rule

The Volcker rule, named after the former chairmen of the Federal Reserve Paul Volcker, is section 619 of the Dodd-Frank Act, which was designed to bring further regulation into the financial market after the 2008 financial crisis. Since its inception in 2009, the Volcker rule has been the focus of much controversy, as many Wall-Street executives believed it to be a purely political move. While there are definitely some weaknesses in how the rule is currently written, it has the potential to be a useful tool in helping to combat a future financial crisis. The Volcker rule was created as a result of the 2008 financial crisis. The crisis itself was brought about by a myriad of unethical activates, the most significant being the sale and marketing

Also known as the Glass-Steagall Act, this piece of legislation prohibited FDIC insured commercial banks from trading in securities. The Act came about after banks lost huge amounts in the 1929 crash by investing in risky securities with customer deposits (Uchitelle, 2010). Much like the Volcker rule, Glass-Steagall was met with much criticism, and was eventually repealed in 1999 by the Gramm–Leach–Bliley Act. Now, while banks were still limited in what they could do with depositor’s money, they were free to engage in proprietary trading with their own money (Uchitelle, 2010). This move towards deregulation paved the way for the 2008 financial

Proprietary trading occurs when firms invest their own capital instead of investing on behalf of their customers. In other words, they are trading to benefit themselves and not a client (Norris, 2011) . This means that banks will be forced to sell off their hedge fund and private equity divisions. The rule itself is derived from the premise that to avoid another bank bailout, financial institutions which hold government backed deposits should not be making speculative investments with government money (Irwin, 2013). Because proprietary trading does not directly support the economy, but rather the bank itself, taxpayer money is put at risk with no economic benefit (Irwin, 2013). But because Proprietary trading takes place during other practices such as market making or underwriting, which are allowed under the Volker rule, the implementation of the Volker rule is challenging and can be messy (Kimberly, Krawiec & Guangya, 2015). Additionally, while the Volcker rule prohibits banks with insured deposits from sponsoring hedge funds, there are exceptions to this rule as well. For example, a bank may organize a hedge fund or private equity fund and serve as a general partner or management member if the bank does not share a similar name as the fund, the banks does not have ownership interest in the fund that exceeds their seed amount, no employees or