The Volcker Rule, part of the Dodd Frank Wall Street Reform and Consumer Protection Act, was one of a number of measures taken in 2010to build more risk protection into the financial systems of the US..
After the crash of 2008–2009, people lost faith in the US banking system and the power of the Treasury to ensure that banks do not participate in unnecessary risk-taking.
Origins of the Volcker Rule
Introduced by Federal Reserve Chairman Paul Volcker in 2009, the Volcker Rule is expected to come into effect in Q1 2014. There are various difficulties in finalising all the fine details of the rule. Though the legislation technically became law in July 2010, four years later it has still yet to be implemented
What the Volcker Rule means for banks
The rule essentially affects all US banks, foreign banking organisations and . bank holding companies. Its main aim is to guard against proprietary trading – the process when a bank trades using its own funds instead of those of a client, in order to turn a profit.
Proprietary trading is generally regarded as high in risk and can lead to significant issues for the banking sector. The most famous example of a proprietary trading disaster is the case of “Rogue Trader” Nick Leeson, who single-handedly brought about the collapse of the UK’s oldest investment bank, Barings in the early 1990s.
The Volcker Rule governs all federally insured depository institutions (IDIs). The architects of the rule hope that by watching these activities, they will reduce the transactions that cause a systemic risk to the financial system. The Rule also applies to equity and hedge funds, including IDIs who sponsor or own hedge funds.
Criticisms of the existing rule
Jacob Lew, the Treasury secretary appointed in 2012, has given the Volcker Rule his full support and has prioritized the completion of the act..