Policy Documents

The Volcker Rule: Not the Solution to Reducing Financial Risk

David John –
February 22, 2010

President Obama has reached into the past to try to resurrect failed bank regulatory approaches as a way of raising the stakes on his newly emphasized financial regulatory plan. Referred to as the “Volcker rule” after former Fed Chairman Paul Volcker, who developed the two-part proposal, it would further restrict the size of financial institutions and prevent those with insured deposits from trading in the financial markets on their own behalf.

Unfortunately, neither part of the proposed rule would do anything to improve the stability of the banking system and would have done absolutely nothing to prevent or even to reduce the impact of the 2008 financial crisis. Worse, if implemented, the rule would actually damage the U.S. financial system. Nor would enacting the Volcker rule do anything to prevent future financial problems. Finally, its implementation could reduce the ability of U.S. banks to compete with foreign rivals.