Proponents of Volcker Rule claim draft regulations contain a giant loophole.
A leaked draft of the much-anticipated Volcker Rule - designed to prevent banks from the type of speculative trading that led to the financial crisis of 2008 – has rekindled the debate surrounding the controversial measure.
Named after former Federal Reserve Chairman Paul Volcker, the rule proposes a ban on proprietary trading - trades banks make with their own assets to earn profits for their own institutions. Proprietary trading can involve high risks and conflict with the interests of bank customers.
The draft is scheduled to be released by the Federal Deposit Insurance Corporation on Tuesday, but a copy was obtained by the American Banker Association and posted on the group’s website. The proposed Volcker Rule - mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – has met with both boos and cheers.
Advocates of the rule are trying to strengthen the draft’s bite, which they say contains enormous loopholes, according to The New York Times. The draft rule allows banks to invest in order to provide capital for trading, but banks must hedge their risks as best as they can. Proponents of the ban on proprietary trading say these “market maker” trades would create a gaping hole in the law.
The loophole would allow banks to continue making risky bets with their own capital, according to The Wall Street Journal. If the language is confirmed, it would be considered a victory for financial institutions lobbying regulators to relax the ban on proprietary trading.
Proprietary trading accounts for the largest share of profits earned by some of the nation’s largest banks. The Volcker Rule not only threatens this revenue, but banks also claim the regulation would restrict the flow of money through financial systems.
The draft is subject to change through the public comment period ending December 16. Final rules are expected in July of next year.
Paul Volcker served as chairman of Obama’s Economic Recovery Advisory Board for two years following the financial crisis. The 83-three-year old economist has had a legendary career both in and out of the public sector. He served the federal government for nearly 30 years, advising five presidents, John F. Kennedy, Lyndon B. Johnson, Richard M. Nixon, Jimmy Carter and Ronald Reagan. He is credited with playing a key role in stabilizing inflation during the 1980s and was instrumental in decoupling the dollar from the gold standard.