Volcker Rule Set to Take Effect in April 2014
Described by President Barack Obama as “a rule that makes sure big banks can’t make risky bets with their customer’s deposits”, the Volcker Rule forms part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and is named for the man who proposed it – former United States Federal Reserve Chairman Paul Volcker. A number of exceptions to the Volcker Rule are included in the Dodd-Frank law, but its main aim is to prevent the type of speculative activity which played a major role in the 2007-2010 financial crisis. The Volcker Rule was originally scheduled to come into effect with the Dodd-Frank law on July 21, 2012, but was delayed for various reasons, and is now scheduled to come into effect on April 1, 2014.
As with any significant change on Wall Street, there are both critics and supporters. In a written statement published in a number of news sources, President Obama made it clear that he is a supporter, noting that the country’s financial system will be safer and the American people will be more secure because of the Volcker Rule which will make it illegal for firms to make use of “government-insured money to make speculative bets that threaten the entire financial system”. The President went on to say that CEOs will be held accountable by being required to sign off on their firm’s practices.
While the Volcker Rule’s objectives may appear uncomplicated, it took three years for five regulatory bodies – the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Federal Reserve Bank – to draw up the 71-page instruction manual, with its 892 pages of explanations.
Although the Volcker Rule prohibits banks from betting on investments with their own money, they can still serve the role of market-makers, buying and selling securities for their clients. They are also permitted to enter into proprietary-type trading transactions provided they do this in order to hedge their bets. Analysts have pointed out that it is often quite difficult to differentiate between these types of trades. In attempting to deal with all these various situations the Volcker Rule has become one of the most complicated in Wall Street’s history.
In an ever-changing marketplace, it remains to be seen whether the Volcker Rule will work. It was written to deal with unprecedented circumstances and once the economy has recovered and the public regains a sense of security, it is thought that regulators may slacken their vigilance in monitoring the financial industry. Loopholes may be discovered and exploited, but at this time it is anticipated that the Volcker Rule will return some sense of stability to a badly shaken financial system.