October 13th, 2011
The Volcker Rule: What the heck is it?
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Banks have been gambling with your money, but a new piece of legislation is trying to stop them.
It’s called the Volcker Rule, named for economist and former U.S. Federal Reserve Chairman Paul Volcker. The rule, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, restricts banks from making certain investments that do not benefit their customers, also known as speculative investments.
Many economists, especially Volcker himself, argue that these speculative investments, which include risky mortgage-backed securities, helped fuel the credit crisis of 2008. After being appointed as the chair of the President’s Economic Advisory Board in February 2009, Volcker began working with the board to advise the administration on economic recovery concerns. The Volcker Rule is a part of that work.
How it will affect banks
It’s not clear what specific actions banks will have to take to comply with the new rule, which goes into effect on July 21, 2012, but it is clear that banks will have to change how they do business. In the past, banks have been able to trade stocks and commodities, typically using money provided by their own customers. The Volcker Rule would restrict them from using customer deposits to trade on the bank’s personal accounts.
Banks are nervous that the new provisions will hurt their bottom line and cost them a lot in compliance, since the rule would restrict them from trading their own profits. One analyst suggests that it could cost big banks at least $2 million annually, and banks are already struggling to grow their profits in the current economy. At least one major financial institution is considering dropping its status as a bank holding company before the rule goes into effect.
While specific steps haven’t been outlined yet, the regulators who authored the Volcker Rule are currently seeking feedback from banks and the public through Jan. 13.
How it will affect consumers
First of all, it’s important to know that consumers will get a chance to submit official comments on the Volcker Rule before the final version is written. For now, the U.S. Commodity Futures Trading Commission has an email address set up for non-official comments (VolckerRule@CFTC.gov), but the public should keep its eye on the CFTC’s website for updates on ways to submit official comments.
There are several ways that the Volcker Rule could affect consumers. Until the final version is drafted next year, it’s merely speculation. Here are a few of the changes consumers could begin to see:
More small business loans. Banks will be encouraged to make investments with more value, which could mean that more small business owners will be approved for loans.
Increased banking fees. Another possible result of the Volcker Rule may come in the form of more fees charged to bank customers. With current public frustration in the light of new debit card-related fees, this wouldn’t go over well but could be big banks’ last resort.
Bank layoffs. As banks begin strategizing how to absorb the impact of their lost profits, they may be pushed to reduce their numbers. Of course, only time will tell what measures banks will be required to take.
No bailouts. If regulators and the public have their way with the rule, it should mean that bank bailout risks would be reduced. In other words, taxpayers won’t be required to get banks out of trouble after risky investments go sour.
The Bottom Line
Though it’s still unclear in how it will be implemented, the Volcker Rule could be a win for consumers. Banks could become better regulated and restricted from making risky trades, and consumers could have less cause to worry about another credit crisis. It may not be the kind of financial overhaul that Occupy Wall Street protestors are looking for, but it’s a small step in the right direction.
Have a Karmic day,
Bethy Hardeman, Social Media Maven
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