Congress drags feet on Volcker Rule, Wall Street reform

As a provision of 2010′s Dodd-Frank Act, the Volcker Rule separates retail banking and investment banking into separate businesses. Many experts believe this is important to Wall Street reform, but Congress has dragged its feet, claiming that enacting Volcker will damage liquidity and increase transaction costs for consumers.

Free market deregulation or regulated capitalism

Today is the last day for public comment on the Volcker Rule. This specific part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was proposed by former U.S. Federal Reserve Chair Paul Volcker, would restrict U.S. banks from making speculative investments that do not benefit customers. Volcker believed, as many other financial analysts did, that such speculation played a key role in the country’s financial crisis from 2007-2010.

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At the heart of the Volcker Rule is what is often referred to as a ban on propriety trading by commercial banks. This is when deposits are used to trade on a the bank’s personal accounts. Volcker would strictly limit this type of trading, forcing banks to “shift focus on the business of banking,” according to Bankrate. Bets on questionable assets would be largely de-emphasized. By separating consumer and investment banking, potential conflicts of interest would be minimized.

Critics cry foul

Numerous opponents to the Volcker Rule, including conservative members of Congress, believe that the rule will have a number of unintended consequences, including reduced liquidity in corporate bonds and increased transaction costs for investors. A study by global consulting firm Oliver Wyman broke down some of the projected costs and impacts of the Volcker Rule. Among them are:

• Decrease in corporate bond value, leading to liquidity loss, by as much as $990 billion market-wide
• Increased interest rates for bond issuers due to investor demand for greater liquidity
• Investors having to pay higher transaction fees, as much as $4 billion market-wide

The Wyman study noted that bond issuers would be required to pay higher yields on new debt raised to compensate investors for “holding less liquid assets.” Estimated cost to issuers may be as high as $43 billion after outstanding debts have been refinanced at the higher rate.

Breaking down the Volcker Rule

Sources

Bankrate

Reuters

Volcker Rule Wiki