ADARSH ARORA

ROLL NO – 2020007/DIV –A

VOLCKER RULE

What Is the Volcker Rule?

The Volcker Rule is a federal regulation that generally prohibits banks from
conducting certain investment activities with their own accounts and limits their
dealings with hedge funds and private equity funds, also called covered funds.

Understanding the Volcker Rule

The Volcker Rule aims to protect bank customers by preventing banks from making
certain types of speculative investments that contributed to the 2008 financial crisis.
Essentially, it prohibits banks from using their own accounts for short-
term proprietary trading of securities, derivatives, and commodity futures, as well as
options on any of these instruments.

The Volcker Rule also bars banks, or insured depository institutions, from acquiring
or retaining ownership interests in hedge funds or private equity funds, subject to
certain exemptions.
In other words, the rule aims to discourage banks from taking too much risk by
barring them from using their own funds to make these types of investments to
increase profits. The Volcker Rule relies on the premise that these speculative
trading activities do not benefit banks’ customers.

Additional History of the Volcker Rule

The rule's origins date back to 2009 when economist and former Fed Chair Paul
Volcker proposed a piece of regulation in response to the ongoing financial crisis
(and after the nation's largest banks accumulated large losses from their proprietary
trading arms) that aimed to prohibit banks from speculating in the markets. Volcker
ultimately hoped to re-establish the divide between commercial
banking and investment banking—a division that once existed but was legally
dissolved by a partial repeal of the Glass-Steagall Act in 1999.

What Was the Goal of the Volcker Rule?

Volcker Rule's origins date back to 2009 when economist and former Fed
Chair Paul Volcker proposed a piece of regulation in response to the ongoing
financial crisis (and after the nation's largest banks accumulated large losses
from their proprietary trading arms). The aim was to protect bank customers
by preventing banks from making certain types of speculative investments
that contributed to the crisis.
Essentially, it prohibits banks from using their own accounts (customer funds)
for short-term proprietary trading of securities, derivatives, and commodity
futures, as well as options on any of these instruments. Volcker ultimately
hoped to re-establish the divide between commercial banking and investment
banking—a division that once existed but was legally dissolved by a partial
repeal of the Glass-Steagall Act in 1999.

What Are the Main Criticisms of the Volcker Rule?

The Volcker Rule has been widely criticized from various angles. The U.S.
Chamber of Commerce claimed in 2017 that a cost-benefit analysis was
never done and that the costs associated with the Volcker Rule outweigh its
benefits.1 9

The Federal Reserve's Finance and Economics Discussion Series (FEDS)

argued that the Volcker Rule will reduce liquidity due to a reduction in banks'
market-making activities. Additionally, IMF analysts have argued that
regulations to prevent speculative bets are hard to enforce.