Summary of The Volcker Rule and Market-Making in Times of Stress

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The Volcker Rule and Market-Making in Times of Stress summary

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Economists Jack Bao, Maureen O’Hara and Alex Zhou look into whether regulators have gone overboard in their curtailing of the financial sector’s activities following the 2008 financial crisis. They examine the Volcker Rule, one of the crisis-inspired regulations, and its impacts so far on liquidity in the corporate bond market. Their findings describe a butterfly effect in the financial ecosystem: The commendable aim of protecting taxpayers from banks’ speculation can have harmful unintended consequences. getAbstract suggests this scholarly, illuminating analysis to regulators, financial executives, broker dealers and risk managers.

About the Authors

Jack Bao and Alex Zhou are economists at the Federal Reserve Board. Maureen O’Hara is a finance professor at Cornell University.

Summary

One regulatory consequence of the 2008 financial crisis was the enactment of the Volcker Rule, which limited certain financial institutions’ ability to engage in speculative activities. The rule says that a bank that has recourse to government support can’t engage in trading for its own account or have a stake in hedge funds or private equity funds. But observers have expressed concerns that the Volcker Rule could also result in curbing liquidity in the bond market, given that the regulation affects the market-making activities of banks.

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