Summary of Rethinking the Volcker Rule

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To protect consumers following the 2008 financial crisis, the United States introduced the 2010 Dodd-Frank Act containing the Volcker Rule, which forbids financial institutions that rely on deposit insurance from proprietary trading. The aim was to reduce the moral hazard that entices banks to take excessive risks. Authors Hester Peirce and Robert Greene condemn the Volcker Rule and assert that market participants, not regulators, should monitor banks. Though always politically neutral, getAbstract believes this provocative article will ignite debate among economists and policy makers across the political spectrum.

In this summary, you will learn

  • What the Volcker Rule stipulates;
  • Why some economists view it as counterproductive;
  • How federal deposit insurance encourages moral hazard; and
  • How to trigger risk-monitoring behavior among banks’ depositors, creditors and shareholders.
 

About the Author

Hester Peirce is a senior research fellow at the Mercatus Center, where Robert Greene is a research associate.

 

Summary

When the Great Depression wreaked havoc on the American economy, the US government established deposit insurance to curtail future panics and bank runs. However, such protection spurs moral hazard: Investors are less likely to scrutinize banks when they know their savings are secure, and banks are more...

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