Clampdown on Wall Street

Aimed at curbing risky trading by banks, the 'Volcker Rule' has been approved by regulators in America.

Four years after it was first proposed, US regulators have approved the Volcker Rule.

Named after the former chairman of the US Federal Reserve, this bans banks from making bets with their own money proprietary (prop) trading in order to reduce the likelihood of Wall Street's big players engaging in overly risky activity and requiring a bail-out.

What the commentators said

Still, as the FT pointed out, implicit state guarantees for big banks and lax regulation of prop trading helped fuel the credit bubble. But turning the Volcker rule into a workable law has proved "fiendishly difficult". A key issue is deciding what constitutes prop trading and what is market making, whereby a bank buys and sells assets for clients.

For instance, said The Daily Telegraph, the process of making a market, or establishing a price, for a client will often involve the firm holding a certain amount of the product on its own balance sheet.

"How do you know whether a certain amount of overstocking might amount to no more than an optimistic view on trading volumes rather than an outright bet on... the product's price?

Practical difficulties notwithstanding, said David Reilly in The Wall Street Journal, the Volcker rule will be worthwhile if it marks a first step towards stopping banks having their fingers in so many pies that they become too big to fail.

Why, for instance, are they allowed to run their own fund management arms, when implicit government backing gives them an advantage over stand-alone firms and encourages risk taking? And shouldn't other companies, rather than banks, handle market making? We must get "banks back to being banks".

Recommended

Andrew Hunt: why it's a great time to be a deep value investor
Value investing

Andrew Hunt: why it's a great time to be a deep value investor

Merryn talks to Andrew Hunt, author of Better Value Investing, about his adventures in the market's dark underbelly, looking for the hated and neglec…
22 Oct 2021
Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021
Back on track: why you should invest in railways
Share tips

Back on track: why you should invest in railways

Rail transport suffered a severe blow in the pandemic. But while post-Covid-19 working patterns may reduce revenue, trends in technology, long-distanc…
22 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021

Most Popular

How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021