what is the volcker rule 
the volcker rule is a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds also called covered funds understanding the volcker rulethe volcker rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2007 2008 financial crisis essentially it prohibits banks from using their own accounts for short term proprietary trading of securities derivatives and commodity futures as well as options on any of these instruments in august 2019 the u s office of the comptroller of the currency occ voted to amend the volcker rule in an attempt to clarify what securities trading was and was not allowed by banks 2 on june 25 2020 federal deposit insurance corp fdic officials said the agency will loosen the restrictions of the volcker rule allowing banks to more easily make large investments into venture capital and similar funds 31the volcker rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2007 2008 financial crisis in addition banks will not have to set aside as much cash for derivatives trades among different units of the same firm that requirement had been put in place in the original rule to ensure that banks wouldn t get wiped out if speculative derivative bets went wrong loosening those requirements could free up billions of dollars in capital for the industry the volcker rule is named after economist and former federal reserve fed chair paul volcker who died on dec 8 2019 at age 92 4 the volcker rule refers to section 619 of the dodd frank wall street reform and consumer protection act of 2010 which sets forth rules for implementing section 13 of the bank holding company act of 1956 5the volcker rule also bars banks or insured depository institutions from acquiring or retaining ownership interests in hedge funds or private equity funds subject to certain exemptions 6 in other words the rule aims to discourage banks from taking too much risk by barring them from using their own funds to make these types of investments to increase profits the volcker rule relies on the premise that these speculative trading activities do not benefit banks customers the rule went into effect on april 1 2014 with banks full compliance required by july 21 2015 although the fed has since set procedures for banks to request extended time to transition into full compliance for certain activities and investments 7 on may 30 2018 fed board members led by chair jerome jay powell voted unanimously to push forward a proposal to loosen the restrictions around the volcker rule and reduce the costs for banks that need to comply with it 8 the goal according to powell was to replace overly complex and inefficient requirements with a more streamlined set of requirements 9the rule as it exists allows banks to continue market making underwriting hedging trading government securities engaging in insurance company activities offering hedge funds and private equity funds and acting as agents brokers or custodians banks may continue to offer these services to their customers to generate profits however banks cannot engage in these activities if doing so would create a material conflict of interest expose the institution to high risk assets or trading strategies or generate instability within either the bank or the overall u s financial system depending on their size banks must meet varying levels of reporting requirements to disclose details of their covered trading activities to the government larger institutions must implement a program to ensure compliance with the new rules and their programs are subject to independent testing and analysis smaller institutions are subject to lesser compliance and reporting requirements 10additional history of the volcker rulethe rule s origins date back to 2009 when volcker proposed a piece of regulation in response to the ongoing financial crisis and after the nation s largest banks accumulated large losses from their proprietary trading arms that aimed to prohibit banks from speculating in the markets volcker ultimately hoped to reestablish the divide between commercial banking and investment banking a division that once existed but was legally dissolved by a partial repeal of the glass steagall act in 1999 although not a part of then president barack obama s original proposal for financial overhaul the volcker rule was endorsed by obama and added to the proposal by congress in january 2010 11in december 2013 five federal agencies the board of governors of the fed the fdic the occ the commodity futures trading commission cftc and the securities and exchange commission sec approved the final regulations that make up the volcker rule 7a bank may be excluded from the volcker rule if it does not have more than 10 billion in total consolidated assets and does not have total trading assets and liabilities of 5 or more of total consolidated assets criticism of the volcker rulethe volcker rule has been widely criticized from various angles the u s chamber of commerce claimed in 2017 that a cost benefit analysis was never done and that the costs associated with the volcker rule outweigh its benefits 12 that same year the top risk official of the international monetary fund imf said that regulations to prevent speculative bets are hard to enforce and that the volcker rule could unintentionally diminish liquidity in the bond market 13the fed s finance and economics discussion series feds made a similar argument saying that the volcker rule will reduce liquidity due to a reduction in banks market making activities 14 furthermore in october 2017 a reuters report revealed that the european union eu had scrapped a drafted law that many characterized as europe s answer to the volcker rule citing no foreseeable agreement in sight 15 meanwhile several reports have cited a lighter than expected impact on the revenues of big banks in the years following the rule s enactment although ongoing developments in the rule s implementation could affect future operations future of the volcker rulein february 2017 then president donald trump signed an executive order directing then treasury secretary steven mnuchin to review existing financial system regulations 16 since the executive order treasury officials have released multiple reports proposing changes to dodd frank including a recommended proposal to allow banks greater exemptions under the volcker rule in one of the reports released in june 2017 the treasury said it recommends significant changes to the volcker rule while adding that it does not support its repeal and supports in principle the rule s limitations on proprietary trading the report notably recommends exempting from the volcker rule banks with less than 10 billion in assets the treasury also cited regulatory compliance burdens created by the rule and suggested simplifying and refining the definitions of proprietary trading and covered funds on top of softening the regulation to allow banks to more easily hedge their risks 17since the june 2017 assessment bloomberg reported in january 2018 that the occ has led efforts to revise the volcker rule in accordance with some of the treasury s recommendations 18 a time line for any proposed revisions to take effect remains unclear though it would certainly take months or years in june 2020 bank regulators loosened one of the volcker rule provisions to allow lenders to invest in venture capital funds and other assets 1after the election of president joseph biden in 2020 the new administration signaled its support to reverse the trump era diminutions to the financial system regulations 