The Volcker Rule: Apprehension and doubt as deadline looms

Wall Street is anxiously preparing for the worst as the U.S. Government finalises the sweeping rule for banking industry aimed to ward off another financial crisis.

After almost four years of negotiations, intense lobbying by banks and government fighting, American regulators are expected to announce the definite version of the rule on Tuesday.

Called the “Volcker Rule,” named after chief proponent and former Chairman of the Federal Reserve Paul Volcker, it will curb the risk-taking by banks and forbid them for trading solely for their own profit.

Banks are understandably apprehensive.

If regulators go ahead with the strictest interpretation prepared, a Standard & Poor’s report from last year has stated it could cost the U.S.A.’s eight largest banks upwards of USD 10 billion in yearly profits.

The same report estimated that more lenient rules would see the profits of banks reduced by USD 3 billion.

Whichever side of the fence the ruling lands on, the Volcker rule is expected to impact the future profitability – and consequently market shares – of America’s large-scale capital market banks, and consequently effect the U.S.A.’s entire corporate bond market.

Proprietary trading

Specifying the parameters of proprietary trading has been a complex undertaking.

Whilst the practice produced tremendous profits for America’s financial firms, it was also blamed for the financial crisis’ huge losses.

This led Volcker rule supporters to campaign that banks with government backstops (like deposit insurance) should not be allowed to trade for their own account, as they put taxpayers’ money at risk.

They claim it is a necessary step to prevent banks engaging in risky tactics for profit whilst simultaneously claiming support for the U.S. Government, and across the industry, banks such as JPMorgan Chase & Co. have begun to close down their proprietary trading desks in preparation.

Ever since 2010 and the financial-reform law, the banking industry and regulators have been at loggerheads over what should and should not be allowed.

The unveiling of the report on Tuesday will mark the culmination of that battle, and reveal who gained the upper hand.


According to the Wall Street Journal, at the very least one widespread practice will be shut down; namely portfolio hedging.

This includes trades which are purely intended to offset a bank’s losses – and was cited by JPMorgan as the reason to their “London whale” trading fiasco, which cost the bank over USD 6 billion.

Banks will also learn how the regulators aim to distinguish between trades for the benefit of clients, and for the bank’s own bottom line.

Furthermore, the rule will state how each bank’s chief executives will be required to confirm their compliance, in an attempt to increase accountability.

When the document – currently believed to be over 1,000 pages long – is released, lawyers will pour over its content for their banking clients.

They will also be observing the effect on the country’s regulatory bodies which are to take up the rule.

Whilst the rule is expected to be unanimously agreed upon, any disagreements would highlight the process problems which forestall sessions in court.

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