President Obama has proclaimed that thanks to the Volcker Rule "never again will the American taxpayer be held hostage by a bank that is `Too Big to Fail', " the reality is a bit more complicated.
Though the rule issued today by financial regulators seeks to ban proprietary trading -- essentially gambling with federally insured deposits -- some experts argue that banks will find ways to get around the restrictions to continue engaging in risky behavior. [...]
Backers of the Volcker Rule -- named after former Federal Reserve Chairman Paul Volcker, who helped conceive the regulation -- say it strikes a balance between protecting the public from banks taking unwise risks and enabling financial institutions to meet the needs of their customers. As FDIC Chairman Martin J. Gruenberg noted, a lack of "robust recordkeeping and reporting requirements" made it difficult for regulators to keep track of the activities of large, complex financial institutions. While acknowledging that the rule is far from perfect, proponents say it is an improvement over the status quo.
"From what I hear, the regulators have done a very good job at closing loopholes and opposed opening loopholes," said Wallace Turbeville, a former investment banker who is now a senior fellow at New York think-tank Demos, adding that proprietary trading by banks makes markets more volatile both in the short- and long-term for the average investor. "It's the kind of thing that we can't say conceptually will never happen again, but we have done a lot to make it more unlikely."
