The Volcker Rule is fatally flawed

President Obama meets with his Economic Recovery Advisory Board, led by Paul Volcker, on Oct. 10, 2010, at the White House.

Article Highlights

  • Even Rep. #BarneyFrank, co-author of the #VolckerRule, has urged regulators to simplify it

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  • No one has been able to point to bank proprietary trading as a factor in weakening banks before the 2008 financial panic

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  • By 2008, 55% bank lending was based on real estate, a trend that could lead to more banking crises in a downturn

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Nearly two years ago, in the wake of the financial crisis, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Part of that law, the Volcker Rule-which prohibits banks and their affiliates from engaging in bond trading for their own account-is garnering a lot of attention in Washington these days, none of it positive.

Delegations from foreign countries have complained about its effect on sovereign debt. A bipartisan group of senators has recommended a delay in its scheduled implementation this July, and 26 House Democrats signed a letter pointing out that teachers, police officers and private employees' pension funds stand to lose because of the rule. Even Rep. Barney Frank, co-author of the provision, has urged regulators to simplify it.

Simplification sounds like a reasonable idea, but it's much easier said than done. The regulation is almost 300 pages and contains over 1,000 separate questions for banks and their associates. That's not because the regulators delight in abusing the regulated, but because the regulators are grappling with an impossible problem-how to prohibit proprietary bond trading while preserving bank activities that are vital to the health of the capital markets.

The full text of this article is available via subscription to The Wall Street Journal. It will be posted to AEI.org on Monday, April 16.

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Peter J.
Wallison

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