Why the Volcker Rule Will Harm the U.S. Economy

December 30, 2013

The Volcker rule will impose costs on all companies, not just banks, says Peter Wallison, the Arthur F. Burns Fellow at the American Enterprise Institute.

  • The Volcker Rule prohibits proprietary trading by banks and affiliates.
  • Proprietary trading is when a bank or a related entity buys and sells securities for itself, not for its customers.

However, the Volcker Rule still allows banks to engage in market-making.

  • Market-making is when an entity creates a place to buy and sell securities.
  • When banks serve as intermediaries between bond sellers and buyers, they are acting as market-makers.
  • This is significant because as market-making consists mainly of buying and selling debt securities, it looks a lot like the proprietary trading that the rule outlaws.

This confusion will lead to a chilling effect, as it is going to be difficult for banks to be confident that their trades are legal under the rule. How can entities be certain that their trades will be considered market-making rather than proprietary trading by regulators?

Not only is the rule ambiguous, but its accompanying material is almost 1,000 pages in length. Markets are going to move more slowly in response to this rule, and costs will go up for all companies that issue securities to finance their activities as well as companies that purchase securities for investments.

On top of all of this, the rule exempts U.S. government securities from the Volcker rule restrictions.

Source: Peter J. Wallison, "Why the Volcker Rule Will Harm the U.S. Economy," The American, December 13, 2013.

 

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