Volcker Rule

The Volcker Rule, Section 619 of the Dodd-Frank Act, prohibits banks from proprietary trading (trading for their own profit) and limits investments in hedge funds and private equity funds to 3% of Tier 1 capital. Named after former Fed Chairman Paul Volcker, it aims to prevent banks from making speculative investments that don’t benefit customers and contributed to the 2008 crisis. For example, banks cannot maintain trading desks betting on interest rates or commodities with bank capital. Permitted activities include market-making for clients, hedging, trading government securities, and customer-facilitated trades. Implementation proved complex, requiring banks to prove trades serve customers rather than proprietary purposes. Compliance requires extensive documentation, metrics reporting, and CEO attestation. Large banks dismantled proprietary trading desks, with traders moving to hedge funds. Critics argue the rule reduces market liquidity and increases compliance costs without clear benefits. Supporters contend it reduces systemic risk by preventing federally-insured banks from casino-like speculation. Recent amendments simplified compliance for smaller banks while maintaining restrictions on the largest institutions.