Skip to content

The Volcker Rule

Photographer: Michael Nagle/Bloomberg
Updated on

When Paul Volcker, the former U.S. Federal Reserve chairman, in 2009 proposed banning many forms of short-term trading by federally insured banks to reduce risk to taxpayers and the world economy, he did it in one paragraph. Four years later, regulators issued a final rule, based on Volcker’s proposal, that limited banks’ ability to buy and sell stocks, bonds, currencies and risky derivative instruments for their own accounts. It ran close to 100 pages, with hundreds more in supporting material — and no one was quite sure how it would be enforced. By the time the rule finally took effect in 2015, it had become a lesson in how complicated simplifying Wall Street can be. Four years later a friendlier administration proposed changes that were somewhat more to the liking of the banks. But the act’s overall continuity underscored to what extent Wall Street had learned to live with a rule it once dreaded.

Under orders from President Donald Trump to ease banking regulations that grew out of the 2008 financial crisis, the Fed and four other regulatory agencies finalized Volcker Rule revisions in August 2019. They wouldn’t simplify the rule so much as clarify where the lines between permitted and banned activities would be drawn. The changes were more marginal than major, raising questions about what impact they might have on trading. Trading by banks for their own profit — what’s known as proprietary or prop trading — would remain prohibited, and lenders would still face restrictions on investing in private equity and hedge funds.  But the proposal would make it easier to trade for purposes of what’s known as market-making — the steady stream of securities that banks buy, sell and hold as middlemen. In one of the biggest changes, banks will no longer be assumed to be engaging in banned trades when they conduct short-term transactions. The so-called rebuttable presumption was part of what Wall Street hated most about the original rule.