February 28, 2013

Volcker Rule Continues to Trouble Regulators and Industry

Hester Peirce

Former Senior Research Fellow
Summary

Federal regulators are still struggling to finalize the long-awaited Volcker rule—a component of the Dodd-Frank Act of 2010 that prohibits banks from engaging in proprietary trading and limits their investment in hedge funds. Now it’s being reported that the final rule won’t be ready until the second half of this year, creating more uncertainty for the private sector.

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Federal regulators are still struggling to finalize the long-awaited Volcker rule—a component of the Dodd-Frank Act of 2010 that prohibits banks from engaging in proprietary trading and limits their investment in hedge funds. Now it’s being reported that the final rule won’t be ready until the second half of this year, creating more uncertainty for the private sector.

Mercatus Center senior research fellow Hester Peirce—former counsel on the Senate Banking Committee during the drafting of Dodd-Frank and co-author of the book Dodd-Frank: What it Does And Why It’s Flawed—said that the lengthy delay speaks to the fundamental flaws of the Volcker rule provision.

“The latest Volcker rule delays offer telling insights about the broader Dodd-Frank process. The Volcker rule provision was added to Dodd-Frank in response to compelling rhetoric rather than careful deliberation. Little thought was given to implementation details. A lot of the difficult decisions were left to regulators.

“Disputes among regulators resulted in the unnecessary issuance of two Volcker rule proposals instead of just one. Now disagreements are again manifesting themselves in the delayed release of a final rule. Meanwhile, there is an expectation from regulators that the financial industry take steps to come into compliance with the unfinished rule. This situation is bad for markets, which like clear guidelines and certainty.

“Because of the nature of the rule, even when it is finalized, there will be many questions about how it works. These problems could have been avoided if all the time and attention that has been poured into this rule had instead been devoted to reintroducing market discipline over bank activities. If shareholders and creditors perceive that their money is truly on the line for bank risk-taking, they will be more vigilant than a regulatory regime ever could be.”