Policy Documents

Volcker Rule May Make the Banking and Financial System Riskier

David C. John –
April 26, 2012

By now, it should be clear even to casual observers that the Volcker Rule, which was intended to limit the “risky” activities of banks by banning them from certain types of transactions, will be nearly impossible to implement without severe unintended damage to the U.S. financial system and many other types of businesses both here in the U.S. and overseas.

Even though the Federal Reserve now says that banks will not have to fully comply with it until July 2014,1 they will have to show “good faith planning efforts” to prepare for full compliance in the interim. Combined with the continuing confusion about what the Volcker Rule will actually prohibit, the rule will continue to cause serious uncertainty about the structure and services provided by banks for at least the next two years. Since neither the banks nor the regulators have any idea what the final regulations will say, they will have no idea what constitutes good faith efforts to comply.

Because of the continuing confusion and its effects on the financial system, Congress should immediately begin a serious re-examination of the Volcker Rule’s likely effect both in this country and abroad and repeal it as quickly as possible.