Volcker Rule Takes Effect On Big Banks

| by Ethan Brown

The Volcker Rule, built as a significant part of the Dodd-Frank financial reform legislation in 2010, officially took effect on July 22, with major banking institutions ready for the increased regulations.

According to the International Business Times, the Volcker Rule “aims to curb some of the riskiest activities on Wall Street and make the financial system safer.” The rule attempts to block activity that could possibly lead to another economic collapse precipitated by the banking industry, such as happend in the 2008 economic downturn.

More specifically, the rule bans banks from engaging in proprietary trading, or using deposits insured by the federal government to bet on the stock market. In 2007-2008, many large banking institutions used these deposits to bet on the housing industry, right before the “bubble” burst at the end of 2007.

In response to the Dodd-Frank legislation passed in 2010, banks removed entire sections of their workforce that specifically dealt with proprietary trades. For example, Goldman Sachs sold its operations to another organization shortly after Dodd-Frank was voted in favor by Congress.

Critics say loopholes in the Volcker Rule allow banks like JPMorgan to continue risky trading practices. Democratic Sen. Jeff Merkley of Oregon has labeled a loophole the “JPMorgan loophole” and said it was “big enough to drive a ‘London Whale’ through,” referring to a risky deal JPMorgan made as part of its hedging strategy with a British client; the bank lost $2 billion in the practice.

While the Volcker Rule was initially set to be implemented in July 2010, it has been delayed numerous times since, Fortune reported. It was also noted that banks were still unsure how the rule would precisely affect their organizations, but remained on alert in case of negative feedback from their clients over the new federal regulations.

Sources: International Business Times, Fortune / Photo credit: Mike Mozart/Flickr Creative Commons