Big banks shouldn’t act like hedge funds by making unsafe bets that can ruin the economy. Here, What is the Volcker rule and Why is Donald Trump interested in it?
10 April, AtoZForex – Wall Street and smaller banks across the country are noisy at the thought that one of the most important rules brought in to subdued them after the 2008 crash could soon be scrapped. For the Democrats who pushed the rule through, it could be the start of earnings to the days of pre-2008 excess. Also, to the new Trump administration, the financial sector, it would be a barrier for the economy to grow again.
What is the Volcker rule?
The Volcker Rule refers to 619 (12 U.S.C. 1851) part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Moreover, Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.
Why is Trump interested in it?
Many bankers, the Wall Street and the Donald Trump’s administration thinks to kill the Volker rule. When even Daniel Tarullo is permitting the need for change, then the rule is likely on the way out. In a speech on Wednesday, he pointed out the three main problems:
1. The Volcker Rule covers way more banks than it was supposed to, imposing unnecessary costs on community banks which don’t do risky trading.
2. It appears to have terrified banks out of making markets in key sectors of financial markets such as corporate bonds. This makes it more costly for companies to raise money through the bond market.
3. It’s impossible to enforce lawfully, inasmuch as it requires supervisors to view what was going through bankers’ minds when they made particular trades. Was it lawful market-making? Or was it speculation?
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