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[[File:Paulvolcker.jpg|thumb|[[Paul Volcker]]]]
[[File:Paulvolcker.jpg|thumb|[[Paul Volcker]]]]
The '''Volcker Rule''' is a specific piece of the [[Dodd–Frank Wall Street Reform and Consumer Protection Act]] originally proposed by American economist and former United States [[Federal Reserve]] Chairman [[Paul Volcker]] to restrict United States banks from making certain kinds of [[speculation|speculative]] investments that do not benefit their customers.<ref>{{cite news |url=http://www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935.html |title= Obama's 'Volcker Rule' shifts power away from Geithner|author=David Cho, and Binyamin Appelbaum |date=January 22 |work= |publisher= [[The Washington Post]]|accessdate=13 February 2010}}</ref> Volcker argued that such speculative activity played a key role in the [[financial crisis of 2007–2010]]. The rule is often referred to as a ban on [[proprietary trading]] by commercial banks, whereby deposits are used to trade on the bank's personal accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.<ref>{{Cite web|url=http://motherjones.com/kevin-drum/2010/04/prop-trading-and-volcker-rule|accessdate=2011-09-28|title=Prop Trading and the Volcker Rule}}</ref><ref>{{cite news |author=[[Floyd Norris]] |coauthors= |title=Bank Rules That Serve Two Masters |url=http://www.nytimes.com/2011/10/14/business/new-dodd-frank-rules-muddled-by-congress-that-wants-it-both-ways.html?_r=1&src=recg |quote=The Volcker Rule, as enacted, 'generally prohibits banking entities from engaging in proprietary trading,' as the regulators stated in their opus this week. But the law goes on to provide exemptions for such things as “trading on behalf of customers,' 'risk-mitigating hedging activity' and 'underwriting and market-making activities.' |newspaper=[[New York Times]] |date=October 13, 2011 |accessdate=2011-10-14 }}</ref> The rule's provisions are scheduled to be implemented as a part of Dodd-Frank on July 21, 2012.<ref>{{Citation |url=http://www.reuters.com/article/2011/10/11/us-financial-regulation-volcker-idUSTRE79A3I920111011|accessdate=2011-10-11 | title=U.S. reveals Volcker rule's murky ban on Wall St. bets | work=Reuters | first=Dave & Alexandra | last=Clarke & Alper | date=October 11, 2011}}</ref>
The '''Volcker Rule''' is a specific section of the [[Dodd–Frank Wall Street Reform and Consumer Protection Act]] originally proposed by American economist and former United States [[Federal Reserve]] Chairman [[Paul Volcker]] to restrict United States banks from making certain kinds of [[speculation|speculative]] investments that do not benefit their customers.<ref>{{cite news |url=http://www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935.html |title= Obama's 'Volcker Rule' shifts power away from Geithner|author=David Cho, and Binyamin Appelbaum |date=January 22 |work= |publisher= [[The Washington Post]]|accessdate=13 February 2010}}</ref> Volcker argued that such speculative activity played a key role in the [[financial crisis of 2007–2010]]. The rule is often referred to as a ban on [[proprietary trading]] by commercial banks, whereby deposits are used to trade on the bank's personal accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.<ref>{{Cite web|url=http://motherjones.com/kevin-drum/2010/04/prop-trading-and-volcker-rule|accessdate=2011-09-28|title=Prop Trading and the Volcker Rule}}</ref><ref>{{cite news |author=[[Floyd Norris]] |coauthors= |title=Bank Rules That Serve Two Masters |url=http://www.nytimes.com/2011/10/14/business/new-dodd-frank-rules-muddled-by-congress-that-wants-it-both-ways.html?_r=1&src=recg |quote=The Volcker Rule, as enacted, 'generally prohibits banking entities from engaging in proprietary trading,' as the regulators stated in their opus this week. But the law goes on to provide exemptions for such things as “trading on behalf of customers,' 'risk-mitigating hedging activity' and 'underwriting and market-making activities.' |newspaper=[[New York Times]] |date=October 13, 2011 |accessdate=2011-10-14 }}</ref> The rule's provisions are scheduled to be implemented as a part of Dodd-Frank on July 21, 2012.<ref>{{Citation |url=http://www.reuters.com/article/2011/10/11/us-financial-regulation-volcker-idUSTRE79A3I920111011|accessdate=2011-10-11 | title=U.S. reveals Volcker rule's murky ban on Wall St. bets | work=Reuters | first=Dave & Alexandra | last=Clarke & Alper | date=October 11, 2011}}</ref>


==Background==
==Background==

Revision as of 05:01, 1 December 2011

Paul Volcker

The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.[1] Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's personal accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.[2][3] The rule's provisions are scheduled to be implemented as a part of Dodd-Frank on July 21, 2012.[4]

Background

Volcker was appointed by President Barack Obama as the chair of the President's Economic Recovery Advisory Board on February 6, 2009. President Obama created the board to advise the Obama Administration on economic recovery matters.[5] Volcker argued vigorously that since a functioning commercial banking system is essential to the stability of the entire financial system, for banks to engage in high-risk speculation created an unacceptable level of systemic risk.[6] He also argued that the vast increase in the use of derivatives, designed to mitigate risk in the system, had produced exactly the opposite effect.[7]

Proposal

The Volcker Rule was first publicly endorsed by President Obama on January 21, 2010.[8][9] The proposal specifically prohibits a bank or institution that owns a bank from engaging in proprietary trading that isn't at the behest of its clients, and from owning or investing in a hedge fund or private equity fund, as well as limiting the liabilities that the largest banks could hold.[10] Under discussion is the possibility of restrictions on the way market making activities are compensated; traders would be paid on the basis of the spread of the transactions rather than any profit that the trader made for the client.[11]

On January 21, 2010, under the same initiative, President Obama announced his intention to end the mentality of "Too big to fail."[10]

In a February 22, 2010 letter to The Wall Street Journal, five former Secretaries of the Treasury endorsed The Volcker Rule proposals.[12] As of February 23, 2010, the US congress began to consider a weaker bill allowing federal regulators to restrict proprietary trading and hedge fund ownership by banks, but not prohibiting these activities altogether.[8]

Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, introduced the main piece of the Volcker Rule – its limitations on proprietary trading – as an amendment to the broader Dodd-Frank financial reform legislation that was passed by the U.S. Senate on May 20, 2010. Despite having wide support in the Senate, the amendment was never given a vote. When the Merkley-Levin Amendment was first brought to the floor, Senator Richard Shelby, Republican of Alabama, objected to a motion to vote on the amendment.[13] Merkley and Levin responded by attaching the amendment to another amendment to the bill put forth by Senator Sam Brownback, Republican of Kansas. Shortly before it was due to be voted upon, Brownback withdrew his own amendment, thus killing the Merkley-Levin amendment and the Volcker Rule as part of the Senate bill.[14]

Despite this vote, this proposal made it into the final legislation when the House-Senate conference committee passed a strengthened version of the rule that included the language prepared by Senators Merkley and Levin. The original Merkley-Levin amendment and the final legislation both covered more types of proprietary trading than the original rule proposed by the administration. It also banned conflict of interest trading. Senator Levin commented on the importance of that aspect: "We are also pleased that the conference report includes strong language to prevent the obscene conflicts of interest revealed in the Permanent Subcommittee on Investigations hearing with Goldman Sachs. This is an important victory for fairness for investors such as pension funds and for the integrity of the financial system. As the Goldman Sachs investigation showed, business as usual on Wall Street has for too long allowed banks to create instruments which are based on junky assets, then sell them to clients, and bet against their own clients by betting on their failure. The measure approved by the conferees ends that type of conflict which Wall Street has engaged in."[15]

However, conferees changed the proprietary trading ban to allow banks to invest in hedge funds and private equity funds at the request of Senator Scott Brown (R-Mass.), whose vote was needed in the Senate to pass the bill.[16] Proprietary trading in Treasurys, bonds issued by government-backed entities like Fannie Mae and Freddie Mac, as well as municipal bonds is also exempted.[17][18]

Since the passage of the Financial Reform Bill, many banks and financial firms have indicated that they don't expect The Volcker Rule to have a significant impact on their profits.[19]

Implementation

Public comments to the Financial Services Oversight Council on how exactly the rule should be implemented were submitted through November 5, 2010.[20] Financial firms such as Goldman Sachs, Bank of America, and JPMorgan Chase & Co. posted comments expressing concerns about the rule.[21] Republican representatives to Congress have also expressed concern about the Volcker Rule,[22] saying the rule's prohibitions may hamper the competitiveness of American banks in the global marketplace, and may seek to cut funding to the federal agencies responsible for its enforcement.[21] Incoming Chairman of the House Financial Services Committee, Representative Spencer Bachus (R-Alabama), has stated that he is seeking to limit the impact of the Volcker Rule, although Volcker himself has stated that he expects backers of the rule to prevail over such critics.[23]

Tom McMahon, head of the liberal lobbying group Americans for Progressive Change, responded to comments by Republican leaders by saying "It is truly astounding that less than a day after winning control of the people's House of Representatives, Republican leaders are already hard at work doing the business of big Wall Street banks."[22]

Regulators presented a proposed form of the Volcker Rule for public comment on October 11, 2011, which was approved by the SEC, The Federal Reserve, The Office of the Comptroller of the Currency and the FDIC.[24] The proposed regulations were immediately criticized by banking groups as being too costly to implement, and by reform advocates for being weak and filled with loopholes.[25][26]

Volcker himself stated that he would have preferred a simpler set of rules: “I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”[27]

Regulators have given the public until January 13, 2012 to comment on the proposed draft of the law. Under the Dodd-Frank financial reform bill, the regulations go into effect on July 21, 2012.

Historical antecedents

The Volcker Rule has been compared to, and contrasted with, the Glass–Steagall Act of 1933.[28] Its core differences from the Glass–Steagall Act have been cited by scholars as being at the center of the rule's identified weaknesses.[29]

See also

References

  1. ^ David Cho, and Binyamin Appelbaum (January 22). "Obama's 'Volcker Rule' shifts power away from Geithner". The Washington Post. Retrieved 13 February 2010. {{cite news}}: Check date values in: |date= (help)
  2. ^ "Prop Trading and the Volcker Rule". Retrieved 2011-09-28.
  3. ^ Floyd Norris (October 13, 2011). "Bank Rules That Serve Two Masters". New York Times. Retrieved 2011-10-14. The Volcker Rule, as enacted, 'generally prohibits banking entities from engaging in proprietary trading,' as the regulators stated in their opus this week. But the law goes on to provide exemptions for such things as "trading on behalf of customers,' 'risk-mitigating hedging activity' and 'underwriting and market-making activities.' {{cite news}}: Cite has empty unknown parameter: |coauthors= (help)
  4. ^ Clarke & Alper, Dave & Alexandra (October 11, 2011), "U.S. reveals Volcker rule's murky ban on Wall St. bets", Reuters, retrieved 2011-10-11
  5. ^ "About the President's Economic Recovery Advisory Board". Retrieved 2010-09-14.
  6. ^ Paul Volcker (January 30, 2010). "How to Reform Our Financial System". The New York Times. Retrieved 2 November 2011.
  7. ^ Paul Volcker (October 27, 2011). "Financial Reform: Unfinished Business". New York Review of Books. Retrieved 22 November 2011.
  8. ^ a b "White House Recommits to "Volcker Rule" Bank Trade Ban", Reuters.com, 2010-02-23, retrieved 2010-05-02
  9. ^ The Real News Obama takes on Wall Street?, January 22, 2010
  10. ^ a b President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers, retrieved 2010-02-27
  11. ^ "Trader Pay May Face Restrictions Under Volcker Rules Mandated by Dodd-Frank". Retrieved 2011-09-28.
  12. ^ Former U.S. Treasury Secretaries Endorse Volcker Rule in WSJ, retrieved 2010-02-22
  13. ^ GOP Blocks Three Key Anti-Wall Street Amendments, retrieved 2010-05-21
  14. ^ Herszenhorn, David M. (May 20, 2010), "Bill Passed in Senate Broadly Expands Oversight of Wall St.", The New York Times, retrieved 2010-05-21
  15. ^ Merkley, Levin: Ban on High Risk Trades Victory for Workers and Businesses, Press release, Carl Levin, US Senate.
  16. ^ Taibbi, Matt (August 4, 2010), "Wall Street's Big Win", Rolling Stone, retrieved 2010-08-04
  17. ^ Onaran, Yalman (June 30, 2010), "Volcker Said to Be Unhappy With New Version of Rule", BusinessWeek, retrieved 2010-07-07
  18. ^ Evis, Peter (July 7, 2010), "Volcker's Treasury Exception", The Wall Street Journal: Heard on the Street, retrieved 2010-07-07
  19. ^ Tara LaCapra, Lauren (September 14, 2010), "BofA Says Volcker Rule Won't Be Too Tough", TheStreet.com, retrieved 2010-07-07
  20. ^ Johnson, Simon (November 4, 2010), "The Volcker Rule After the Midterm Elections", The New York Times, retrieved 2010-11-15
  21. ^ a b Mattingly, Phil (November 19, 2010), "Derivatives, `Volcker' Rules May Be House Republican Targets", Bloomberg.com, retrieved 2010-11-23
  22. ^ a b Drawbaugh, Kevin (November 4, 2010), "Rep Bachus warns Geithner on "Volcker rule"", Reuters, retrieved 2010-12-01
  23. ^ Orol, Ronald (December 10, 2010), "Volcker: Worried about mega-bank failure rules", Marketwatch, retrieved 2010-12-13
  24. ^ Protess, Ben (October 12, 2011), "S.E.C. Advances Volcker Rule", New York Times, retrieved 2011-10-12
  25. ^ Clarke & Alper, Dave & Alexandra (October 11, 2011), "U.S. reveals Volcker rule's murky ban on Wall St. bets", Reuters, retrieved 2011-10-11
  26. ^ Touryalai, Halai (October 12, 2011), "Volcker Rule Is Out, How Much Will It Hurt?", Forbes.com, retrieved 2011-10-28
  27. ^ Stewart, James (October 21, 2011), "Volcker Rule, Once Simple, Now Boggles", New York Times, retrieved 2011-10-28
  28. ^ Uchitelle, Louis (January 22, 2010), "Glass-Steagall vs. the Volcker Rule", The New York Times, retrieved 2010-01-27
  29. ^ Chatterjee, R. Rex (June 3, 2011), "Dictionaries Fail: The Volcker Rule's Reliance on Definitions Renders It Ineffective and a New Solution is Needed to Adequately Regulate Proprietary Trading", SSRN, retrieved 2011-10-14
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