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Rethinking the Volcker Rule
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Rethinking the Volcker Rule

Robert Greene
Mercatus Center, 2013
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Editorial Rating

7

Qualities

  • Analytical
  • Concrete Examples
  • For Experts

Recommendation

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.

Take-Aways

  • The Volcker Rule, a section of the 2010 Dodd-Frank Act, prohibits financial institutions that rely on federal deposit insurance from conducting proprietary trading.
  • Federal deposit insurance increases moral hazard; depositors are less likely to monitor banks when they know their savings are secure, and banks are more likely to take risks when they are not under scrutiny.
  • Although rooted in legitimate concerns, the Volcker Rule may be ineffective because it is vague and relies on “regulatory interpretation and an ambiguous separation of permitted and prohibited trading activities.”

About the Author

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

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