How the Volcker Rule Will Affect YouBanker Resource
January 6, 2014 — 1,249 views
Over the past weeks there has been lot of talking about the Volcker Rule. What is this rule anyway and why is everyone talking about it? To begin with, this rule forms a part of Dodd-Frank Financial Reform Act which was passed three years ago in 2010. This rule aims at preventing major banks from engaging in any kind of speculative trading activity. This means that the banks will be allowed to continue giving their support to the economy by lending to businesses and consumers. This rule was brought out taking into consideration the financial collapse of 2008-2009 which is said to be driven by the irresponsible behavior of certain big banks.
What is not Allowed Under the Rule?
But the rule will put a ban on proprietary trading of these big banks. In simple words, it means that banks will not be able to be a part of the investment markets with the goal of making some money for themselves. They definitely won’t be allowed to do so until they are doing it on behalf of their customers. Banks will only be allowed to act as middlemen but won’t be able to trade for their own profit.
That is not all. The rule also tries to limit the bank size. This is so as to ensure that the bank does not get too big to fail. Though there is already a rule in place for this which states that a bank cannot have more than 30 percent of the deposits of the nation, this latest rule is just taking the limit a bit higher. This will make sure that taxpayers will not have to give bailout to another bank, like they had to do after the recent crisis.
This rule has been named after Paul Volcker who is an economist. He was the former chairman of Federal Reserve. Presently, he is the head of President's Economic Recovery Advisory Board. He also has the credit of ending the high inflation period of 1970s and 1980s.
What Does it Means for the Banks?
Though the spirit of the rule has been applauded by many, there are still many problems with the rule that have surfaced. According to an estimate by the American Bankers Association, implementation of this rule will take around 6.5 million work hours. It also mentioned that the law will additionally take around 1.8 million hours for enforcement every year. As far as the banks are concerned, they will have to hire a minimum of 3,000 employees only to remain compliant with the rule. According to another study, this rule will cost investors and banks a sum of $350 million. Apart from that, it could also lead to rise in cost of trading stocks, less efficient markets, and lower trading volume.
Deadlines for Complying
However the bank regulators have been considerate enough to give extra time to banks to comply fully with these rules. They have time until July 21, 2015, to understand the rule and follow it.