The Volcker Rule and Dodd-Frank Act

The Volcker Rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into federal law in 2010.  The Dodd-Frank Act was a direct response to the financial crisis and Great Recession.  The Volcker Rule is named after Paul Volcker, former Chairman of the U.S. Federal Reserve and chair of President Barack Obama’s Economic Recovery Advisory Board, who proposed the rule.  Under the Volcker Rule, banks and federally backed financial institutions are, with certain exceptions, prohibited from proprietary trading.  Essentially, any trading that does not support the economy or a bank’s consumers is outlawed.  However, even though the Volcker Rule is meant to user in new consumer protections, banks will feel more of the affects than consumers.

Proprietary trading is investment made with a bank or financial institution as the principal.  As the principal, the institution keeps all profit.  Proprietary trading uses consumers’ deposits to make the investment.  Any gains or profits do not directly benefit the consumer; rather, these profits are kept by the institution.  Proprietary trading has been named as one of the causes of the financial crisis that led to the Great Recession. 

Financial institutions have indicated that because of the new report requirements and loss of avenues for profit, that consumer fees will either be introduced or raised.   All investments must now be explained as to their rationale of the investment and also whose money is being used to make the investment.  Regulators, from five agencies, will be charged with implement and executive the new rules and reporting procedures.   Banks and agencies will, therefore, be required to hire additional workers to ensure adherence to the law.  With restrictions on trading, institutions must avail themselves of alternative outlets for profit making.  Charges for new employees and recouping of profits will be passed onto consumers in the forms of ATM fees, checking account fees, and lower interest rates on interest bearing accounts, just to name a few.  These fees are limited only by the imagination of institutions.

The Volcker Rule could also affect any company’s efforts to raise capital.  Many businesses rely on loans and investments to build new facilities, supply research and development, and hire additional employees.  With new restrictions on investment and trading, financial institutions speculate that it may be harder to raise the money needed to fund capital investments.  This would affect anyone from the construction industry to manufacturers to those looking for employment. 

The Dodd-Frank Act was passed in 2010.  The implementation of the Volcker Rule was delayed.  Then it was delayed again.  Regulators and banking lobbies pushed back the date of implementation.  Lobbies, not in favor of the rule, tried to delay as much as possible, if not trying to abolish the rule.  Regulators have revised how they will administer and execute the rule, again causing delays.  Currently, financial institutions have until the middle of 2015 to fully comply with the new regulations.  As such, the effects that consumers will feel can only be spoken subjectively and in possibilities.  It remains to be seen the full extent of the Volcker Rule, on institutions, on the economy, and the public.