The Volcker Rule
This week, President Obama announced that he will push a controversial new rule that would force banks to choose between being a commercial institution or an investment bank. The plan is named the Volcker Rule after former Federal Reserve Chairman Paul Volcker, who has pushed to prohibit commercial banks from engaging in so-called proprietary trading, that is transactions conducted for an institution’s own benefit as opposed to transactions carried out for clients, because he deems it is too risky for the financial system.
Under the Volcker Rule, banks will no longer be allowed to own, invest in, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit. The proposed new rule would prohibit banks from engaging in other risky investment activities as well. However, a number of issues must be resolved such as how regulators will define proprietary trading, and whether the rule would prevent a bank from making a trade that would also serve to benefit a client.
The President plans to ask Congress to include the proposed Volcker Rule in the overhaul of the financial regulatory system Congress has been working on, but the rule faces obstacles as it makes its way through Congress, not the least of which will be the objections of the powerful banking industry and its well-financed army of lobbyists. Currently, there is no such language in either the bill passed by the House of Representatives last month or the Senate Banking Committee’s draft bill currently being considered in the Senate.