Volcker Rule

The Volcker Rule i

of the Dodd–Frank Wall Street Reform and Consumer Protection Act (). The rule was 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. Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2008. 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 own accounts, although a number of exceptions to this ban were included in the Dodd–Frank law.

The rule's provisions were scheduled to be implemented as part of the Dodd–Frank Act on July 21, 2010, with preceding ramifications, but were delayed. On December 10, 2013, the necessary agencies approved regulations implementing the rule, which were scheduled to go into effect April 1, 2014.

On January 14, 2014, after a lawsuit by community banks over provisions concerning specialized securities, revised final regulations were adopted. The rule came into effect on July 21, 2015. On August 11, 2016, several large banks requested a 5-year delay to exit illiquid investments.Reuters
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On January 30, 2020, the Federal Reserve put forward a proposal to roll back some provisions of the rule, specifically rules that limit bank investment in venture capital and securitized loans. These changes were adopted on June 25, 2020.

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. 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. 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.

Entry into legislation

The Volcker Rule was first publicly endorsed by President Obama on January 21, 2010. The proposal was to specifically prohibit a bank or institution that owns a bank from engaging in proprietary trading, and from owning or investing in a hedge fund or private equity fund, and also to limit the liabilities that the largest banks could hold. Also under discussion was the possibility of placing restrictions on the way market-making activities are compensated; traders would be paid on the basis of the spread of transactions rather than any profit that the trader made for the client.

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

In a February 22, 2010 letter to ''The Wall Street Journal'', five former Secretaries of the Treasury endorsed the Volcker Rule proposals.
As of February 23, 2010, the U.S. 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.

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 United States 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. 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.

Despite that vote, the 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:

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. The Volcker rule was further amended to allow banks to invest 3% of Tier 1 capital into hedge funds and private equity funds, an amount that would exceed $6 billion a year for Bank of America alone. Proprietary trading in Treasuries, bonds issued by government-backed entities like Fannie Mae and Freddie Mac

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