Why the Volcker Rule won’t solve the problem of Too Big To Fail

The Volcker Rule was originally proposed to end the problem of banks needing taxpayer bailouts. Paul Volcker, the former chairman of the Federal Reserve, proposed that commercial banks using customer deposits to trade — a practice known as proprietary trading — played a key role in the financial crisis that began in 2007.

Five former Secretaries of the Treasury — W. Michael Blumenthal, Nicholas Brady, Paul O’Neill, George Shultz, and John Snow — endorsed the Volcker Rule in an open letter to the Wall Street Journal, writing that banks “should not engage in essentially speculative activity unrelated to essential bank services.”

The Volcker Rule was signed into law as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act in July of 2010, but its implementation has been delayed until yesterday when it finally received approval from the five (!) regulatory agencies that will enforce it — the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

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Britain Separates Retail and Investment Banking — But Will it Work?

A government-commissioned report led by John Vickers into Britain’s financial system has been published — and its chief recommendation is a separating wall between retail and investment banking. This is a very similar system to what prevailed in America until 1996 under the Glass-Steagall Act of 1933. The chief intent is to prevent the endangerment of customers’ savings, mortgages and pensions through banks’ much riskier and more free-wheeling investment arms. This means that the risky but profitable investment banking sector would no longer be considered infrastructural, and — in theory — would be no longer be eligible for bailouts.

From the BBC:

There has been widespread support for a government-backed commission that has recommended UK banks ring-fence retail from investment banking.

The Independent Commission on Banking, led by Sir John Vickers, said it would “make it easier and less costly to resolve banks that get into trouble”.

The ICB called for the changes to be implemented by the start of 2019.

Chancellor George Osborne said the report would mean UK banks could remain competitive.

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