The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act has severely restricted business and consumer access to credit and capital. One of the key regulations contributing to this is the Volcker Rule, named after former Federal Reserve Chairman Paul Volcker. He originally proposed it believing that speculative activity on the part of banks played a significant role in the financial crisis of 2007-2008.
The Volcker Rule prohibits federally insured commercial banks from engaging in certain types of proprietary trading or investing in hedge funds or private equity funds. Proprietary trading is when a firm trades its own capital for profit. The rule exempted market-making (trading securities on a financial firm’s own account to facilitate potential future trades), hedging (trading securities on a financial firm’s own account to mitigate the firm’s risks elsewhere), and trading in government securities from the proprietary trading prohibition.
While established under Dodd-Frank in 2010, the nearly 1,000-page regulation took five different financial regulatory agencies over three years to write. The rule was produced by the entire Financial Stability Oversight Council (FSOC), a multi-agency financial regulatory body created by Dodd-Frank. FSOC members include the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The final rule was implemented in 2015.
The Volcker Rule impacts everyone in the financial system, from banks and investors to small businesses and consumers. It threatens market liquidity by making it harder for banks to trade securities. When capital markets are less liquid and dynamic, small businesses, which are the lifeblood of the economy, struggle to access the capital they need to expand. Consumers who hold credit cards, mortgages, or car loans see their costs of obtaining credit rise. For local economies, this can be the difference between growth and stagnation. The Volcker Rule may have been aimed at Wall Street, but it has hit Main Street the hardest. Fortunately, Congress has an opportunity to provide some relief from this harmful rule, but more will be needed. The Volcker Rule should be repealed.