Volcker Rule: Responsible, Meaningful Regulation…Maybe

By Ken Cynar, executive vp, Governance & Accountability Institute  Spawned from the fiscal crisis of 2008 and subsequent legislation, the Volcker Rule was released this past week and was surprisingly a reasonable, well thought out regulation drafted by people who know the banking business. Rather than being an assault on Wall Street banking, it appears, so far, to address legitimate concerns if in a somewhat complex 70 page rule and an over 800 page explanation. According to Reuters, — “While the U.S. rule bans banks from making blatant bets on securities or other assets, it gives them leeway to make judgments, such as how many assets they should buy in anticipation of customer demand. Banks had worried they would have much less leeway that what is being allowed.” (U.S. Volcker rule may have less impact on bank revenues than expected)

As with any regulation, its impact and effectiveness will be determined by how it is enforced and the “interpretations of the rules.” But for now it appears Washington regulators did not draft a rule that had the potential for putting the financial system in chaos. That does not mean that the rule was well received by all. On point it is long…very long. It is longer that the Greek Version of the New Testament and does have complexity that would make even cause Moses some confusion.

Allan Sloan at Fortune writes, “Great sound bites often make for bad policy, because things that seem wonderful and simple in the abstract frequently turn out to be hideously complicated when you try to apply them in real life. That’s my takeaway from the Volcker Rule, which was unveiled in mid-December after five different federal financial regulatory agencies — another example of real-world complexity — finally signed off on it.” (The Volcker Rule: Complexity trumps common sense)

While Sloan is right, I expected something much worse and am surprised at the reasonableness of the approach, but the complexity is a real concern. Sloan puts its plainly “The Volcker Rule is better than nothing, but it’s just not worth the effort and expense expended on it or the problems it has caused and will cause.”

Did Wall Street dodge a bullet and did the people get more protection from speculative bankers taking high risks with other people’s money…on balance I think that’s what happened. The Volcker Rule reigns in high risk and at the same time does not stop the banks from balancing their investments. Not a perfect law; but most are not. Now the challenge is how it can and will be enforced. That’s how I see it.

 

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