When Congress passed the Dodd-Frank Act to regulate the big investment banks so that a financial meltdown like the one we experienced five years ago “would never happen again,” a centerpiece of the effort was the Volcker Rule, named for former Fed chairman Paul Volcker. When Volcker initially formulated the rule, it was simple enough to fit on the back of an envelope: banks could not engage in “proprietary trading.” That is, banks could not hold and trade equities, for profit, on their own accounts. Banks were to be restricted to engaging in financial activities that served and profited clients. A simple rule. But alas, the world was not so simple. Banks had “legitimate” reasons to hold and trade equities. For example, there is “risk-mitigating hedging,” banks may need to invest in hedging instruments to manage the risks of their other financial transactions. Also, a bank may want to acquire securities not for itself but “in anticipation of customer demand”—to “make a market.” So exceptions would have to be carved out. What exceptions, and worded how? The lobbyists had a field day, and each of the five regulatory agencies involved has had a slightly different set of concerns. Years went by and hundreds of pages were added to Volcker’s simple idea. Now, at long last, the relevant regulatory agencies have agreed on a version of the Volcker Rule. The battle is not over, of course: there will likely be more lobbying efforts by banks, and even lawsuits. But at this point, it looks as though some version of the rule will be operative before too long.
Image Courtesy of Stuart Miles / FreeDigitalPhotos.net
To read the original article: The Volcker Rule: Why Rules are No Substitute for Wise Regulators | LinkedIn
