The Volcker Rule comes out today. Here is what it aims to do:
- Prohibit "proprietary trading," which is investment by a bank with its own money rather than its customer's money. Banks are supposed to advise and control their customers' investments, but when banks are themselves private investors it can create sticky conflicts of interest and more volatile markets.
- Set new capital and diversification requirements on non-bank financial entities that engage in proprietary trading.
- Require bank executives to personally guarantee compliance with regulation, flipping the burden from the regulator (who previously needed to prove non-compliance) to the bank (which now needs to prove compliance).
These new rules are being drafted by five agencies-- the Federal Reserve, the SEC, the FDIC, the Commodity Futures Trading Commission, and the Comptroller of Currency-- which were given this regulatory power by the Dodd-Frank Act in 2010. Its goal is to decrease market volatility and weaken the severity of crashes like the one that occurred in 2008 by preventing the kind of investment behavior that creates those market circumstances. Part of this is a reaction to the London Whale fiasco that cost JP Morgan $6 billion.
Will it work? Treasury Secretary Jack Lew says "I think so." Treasury Jack Lew may be a very reliable source on the matter, or he may be a very unreliable source on the matter. So either way, his more-or-less substance-free, plausibly deniable guess is both meaningless and as good as we're going to get for now.
Bennett Hartz is an associate attorney at Drewes Law, PLLC who specializes in defending against debt collection and foreclosure. He can be reached by email at firstname.lastname@example.org.
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