One of the key reforms included in the Dodd-Frank financial reform law is the Volcker rule, which is aimed at preventing banks from making risky investments with funds that are backed by the federal government. As we wrote when the rule was being debated in Congress, “the overarching goal [of the Volcker rule] would be to ensure that federally backstopped institutions stick to core banking practices such as lending and deposit taking while removing the federal safety net from riskier activities that are divorced from customer services.”
The rule is named after former Federal Reserve Chairman Paul Volcker, one of the foremost proponents of strong financial regulation aimed at preventing a replay of the 2008 financial crisis. When the Volcker rule first became law, Volcker himself was reportedly disappointed in how weak Congress had made it. Now that regulators have officially released a draft version of the rule, the verdict is in — Volcker isn’t on board with the rule:
“I don’t like it, but there it is,” Mr. Volcker told me in his first public comments on the sprawling proposal.
“I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”
As former Sen. Ted Kaufman (D-DE), who was one of the loudest advocates of a strong Volcker rule, put it, “Here’s the key word in the rules: ‘exemption’…Let me tell you, as soon as you see that, it’s pronounced ‘loophole.’ That’s what it means in English.” The law does indeed include wide exemptions and poses hundreds of questions for regulators to consider moving forward (which the banking lobby surely would be happy to provide answers to).
Thanks to the handiwork of Sen. Scott Brown (R-MA), the Volcker rule was watered down before it even got out of the gate. And now it seems like the banking industry is succeeding in turning it into a piece of Swiss cheese that won’t end Wall Street treating federally backed money like chips in a casino.