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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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".
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published