The Volcker Rule restricts banks’ trading activities to prevent speculation and limit the risk of another financial crisis. It was proposed by Paul Volcker as a member of the Presidential Economic Advisory Board. Banks cannot make speculative investments for their own account, but can do so for the benefit of their customers. The original proposal was watered down after much debate. The rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which underwent significant changes and criticism.
The Volcker government is an economic reform proposed by Paul Volcker, who was once chairman of the Federal Reserve in the United States. One form of that passed in 2010, when the House and Senate developed a financial reform bill to address concerns about the failing economy. Under the Volcker rule, the trading activities of banks are restricted with the aim of preventing speculation and limiting the risks of creating another financial crisis similar to the one that started in 2007 and spread globally.
Volcker proposed this rule as a member of the Presidential Economic Advisory Board, a group of economists and policymakers convened by President Barack Obama to develop policy recommendations to help the United States recover from the economic crisis. Paul Volcker believed that one of the driving forces behind the economic problems in the United States was highly speculative business activity by banks and proposed the Volcker Rule to address this problem. Speculation has also been a historical problem in the banking sector and has been blamed for other financial crashes.
Under the Volcker Rule, banks cannot make speculative investments such as buying hedge funds or get involved in private equity deals if these investments are made for their own account. If a bank can demonstrate that speculation is engaged specifically to benefit the bank’s customers, such as in the case of a bank making private equity investments to support a fund for the bank’s customers, this is permitted by the Volcker Rule.
The original version of this proposed policy was quite strict. After much debate on the financial reform bill, it was significantly watered down at the behest of several lawmakers, acting on the advice of lobbyists and analysts. Banks responded to the regulation by suggesting that they were unlikely to limit their financial activity significantly by being able to make speculative investments on behalf of customers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, the legislative act into which the Volcker government fits, began initially as an aggressive set of reforms designed to address abuses in the financial system. With input from both houses of Congress, as well as the financial sector, some substantial changes were made and some critics suggested that it was not as effective as it could have been, allowing banks more leeway than originally envisioned in previous draft legislation. Conversely, advocates pointed out that better regulation of the industry was better than no change at all.
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