Volcker Rule

● What is it?
The Volcker Rule is a federal regulation that generally prohibits banks from
conducting certain investment activities with their accounts and limits their
dealings with hedge funds and private equity funds, also called covered funds.
It aims to protect bank customers by preventing banks from making certain
types of speculative investments that contributed to the 2008 financial
crisis.

● History
It is named after former Federal Reserve Chairman Paul Volcker. The Volcker
Rule refers to section 619 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The rule went into effect on April 1, 2014. On May 30, 2018,
members of the Federal Reserve Board, led by Chairman Jerome (Jay)
Powell, voted unanimously to push forward a proposal to loosen the
restrictions around the Volcker Rule and reduce the costs for banks that
need to comply with it.

● Specifications
The rule allows banks to continue market-making, underwriting, hedging, trading
government securities, engaging in insurance company activities, offering hedge
funds and private equity funds, and acting as agents, brokers or custodians.
Banks may continue to provide these services to their customers to generate
profits. However, banks cannot engage in these activities, if doing so, would
create a material conflict of interest, expose the institution to high-risk assets or
trading strategies, or generate instability within the bank or the overall financial
system.

● Recent Changes
On June 25, 2020, the Federal Deposit Insurance Commission (FDIC) officials
said the agency would loosen the restrictions from the Volcker Rule. The final
rule modifies three areas of the rule by:
● Streamlining the covered funds’ portion of the rule;
● Addressing the extraterritorial treatment of certain foreign funds; and
● Permitting banking entities to offer financial services and engage in other
activities that do not raise concerns that the Volcker rule was intended to
address.