The Global Economy in Turbulent Times

CHAPTER 81 “Too-Big-to-Fail” and the Volcker Rule Faces Fresh Challenges¹

The public still asks: What’s this Volcker Rule we hear so often these days? I wrote about it on February 13, 2010 (Chapter 80, “Whatever Volcker Wants, Volcker Gets?”), not long after it was first proposed. It took the US Congress close to four years to make it operational. Even so, it remains controversial. I sense there is widespread interest and concern about too-big-to-fail (TBTF). So, here goes. To reduce risks of bank failure, the intention is to prevent banks from gambling with deposits, including small deposits guaranteed by the US federal government, Federal Deposit Insurance Corporation (FDIC). The resulting Volcker Rule (named after its proponent, Paul Volcker, former chairman of the US Federal Reserve Bank—Fed) prohibits “proprietary trading,” that is, making bets with the banks’ money purely for the bank’s own gain rather than to serve its clients. US President Barack Obama described it as a “simple and commonsense reform to strengthen the financial system.”

On December 10, 2013, as authorized by the 2010 Dodd–Frank law overhauling the regulation of US financial institutions, five different regulatory agencies (viz. the Fed; the Office of the Controller of the Currency [OCC]; FDIC; the Securities and Exchange Commission [SEC]; and the Commodity Futures Trading Commission [CFTC]) approved the Volcker Rule (VR) to come into force on April 1, 2014. Ironically, during the long 1,419 days of ...