The U.S. Department of the Treasury called for public comments on potential revisions to the Volcker Rule, a provision of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).
Between August 7 and September 21, the Office of the Comptroller of the Currency (OCC), a division of the U.S. Treasury, accepted public comments on possible revisions to the rule.
President Barack Obama signed Dodd-Frank’s financial restrictions, including the Volcker Rule, into law in 2010 in response to the 2008 economic crisis. The Volcker Rule provisions took effect in 2015.
The rule prohibits commercial banks from owning investment firms or using their own money to invest, as opposed to using depositors’ money.
Had the Volcker Rule been in place before the economic crisis began, the damage would have been even worse, says Jay Richards, an assistant research professor in Catholic University’s Busch School of Business and Economics.
“At the peak of the crisis, Bank of America bought Merrill Lynch,” Richards said. “It was an investment bank, and a commercial bank bought it and kept it from failing. Bear Stearns, the first one to get in trouble, was bought out by JP Morgan Chase. Stearns is an investment bank, JPMorgan is commercial, so that would have failed [under the rule].
“Those two things could not have happened under the Volcker Rule, and would have made the crisis even more catastrophic,” Richards said.
It’s unclear what problems the Volcker Rule prevents or solves, Richards says.
“No one can provide a single example of a crisis that was caused because of [mixing between] commercial and investment banking,” Richards said.
Daniel Press, a policy analyst for the Competitive Enterprise Institute, says the Volcker Rule is confusing and leads to arbitrary decisions.
“The Volcker Rule isn’t very easily enforced,” Press said. “It’s almost impossible to tell the difference between what legitimate proprietary trading is and what they consider illegitimate. As long as you have that wishy-washy definition, you’re going to have this.”
Burden Benefits Big Banks
The cost of regulatory compliance benefits big banks and hurts their smaller competitors, Press says.
“Bigger banks can deal better than smaller banks,” Press said. “A smaller bank that does a little bit of trading can’t risk a regulator coming back and saying [a particular investment] might not have been okay.
“It’s trickle-down compliance, where small banks are impacted a lot worse,” Press said.
Merely reforming the Volcker Rule won’t fix the problems with Dodd-Frank, Press says.
“It’s definitely a good thing to try to ease regulation, but we’re going to run into the same problems,” Press said. “Even easing Volcker is still not as good as full repeal.”