Volcker Rule Draws European Criticism

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Nivine Richie, Ph.D., CFA is an Associate Professor of Finance at the University of North Carolina Wilmington. She teaches courses in corporate financial management, derivatives, fixed income, and commercial bank management. Her research interests include cost of capital, banking, and derivatives. She has published studies in the Journal of Economics and Finance, Journal of Futures Markets, Review of Futures Markets, and Journal of Trading, among others.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed in to law “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes” (see Public Law 111-203).

 

One particular provision of the law, the Volcker Rule, has European governments joining American bankers in protest.

 

According to Andrew Ross Sorkin of the NY Times Dealbook:

 

…The Volcker Rule, that part of last year’s Dodd-Frank financial regulation law that says that banks are not allowed to participate in “proprietary trading.” Translation: Banks can’t make risky bets with their own money. The idea, rooted in ending the too-big-to-fail phenomenon, is to separate the risky casino element of Wall Street from the utility role of helping finance the economy.

 

Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary…about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks—and possibly certain foreign banks that do business in America—would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.

 

European officials claim that this rule will lead to unintended consequences for European governments as they borrow money.

Discussion Questions:

 

·       What is “proprietary trading” and what risks does it pose to a bank?

 

·       What are some potential “unintended consequences” for Europe that may be caused by the Volcker Rule?

 

Comments

Finance wrote More Criticism of the Volcker Rule
on 02-16-2012 10:51 AM

We already know that U.S. banks aren’t happy about the Volcker Rule. And a recent post here showed

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