Introduction
The Volcker Rule is a part of the planned laws of the United States that originated from the Federal Reserve former chairman and economist Paul Volcker. Volcker’s move was to create restrictions to banks from selfish investing mode that were not beneficial to their clients.
According to Volcker, the speculative trade system by the banks greatly contributed in 2007-2008 Wall Street meltdown, which caused a big world recession. The Volcker Rule (ban on property trading) means that clients’ deposits are used as part of the banks’ account for making profits on currencies, stocks and bonds, derivatives, commodities and several other financial instruments (Wieland, 2012).
Critics against Volcker Rule
Following Cheyenne (2012) analysis from SIFMA, a representative of world financial institutions, such as Bank of America, Goldman Sachs and the Blackrock, sees this move as limited to judicial scrutiny as there is evidenced fail in conduction of the system’s cost benefit analysis.
It is impractical to implement the proposal as its cost benefit analysis does not meet the securities and exchange standards as reflected in the commission rule. The proposals have several unfilled gaps on dealing in underwriting, market-making trades and hedging transactions (Cheyenne, 2012).
The move is seen to neglect some loopholes, such as increase on fees. Marketing banks might resolve in charging higher fees onto the investors with the restriction of holding block inventories. This might become the most probable cushioning for the banks. On the other hand, in purchase of customers’ inventory and facilitation, the marketers might decide to regulate the prices, thus going for the lower prices. The length of time taken by the inventories might also result in additional fees charged (Beck, & Wieland, 2008).
Some bankers argue that The Volcker Rule may evidently result in job loses as it changes the trading pattern. Reduction in liquidity in the banks in the US securities and marketing field will lead to translocation of business enterprises to better fields outside the United States. As a result, employment will shift to those areas. The American banks’ securities and incomes employ many people internationally. On the other hand, both the non-covered entities and hedge funds were not proportioned to meet customers’ liquidity demands (Beltrame 2012).
Supports to the Rule
However, as per Quaadman’s (2012) article, it must be considered that the Volcker Rule was geared towards exploitation of the consumers as well as protection into any future economic crisis. As Volcker said before, it was not evident that the proposal would have impact on liquidity, and the arguments were just but superficial.
At the same time, trading in proprieties is a necessary part of not only commercial banks trading but also taxpayers’ support. Hence the banks generally have no strong grounds to critics on regarding the proposal. It is also clear that the issue actually played a critical part during the recession (Quaadman 2012)
Clients and banks’ conflict may be reduced with the execution of the Volcker rule. Now, the banks constantly play an advisory role as well as a crediting one with their own clients which might mislead the customers towards the benefits of the banks. This is a move to ensure that the business environment between the bank and other sectors is well structured and healthy. Execution of the Volcker Rule may clarify the interrelationship between financial institutions and their customers (Quaadman 2012).
Conclusion
The Volcker Rule frightens bankers as they believe that once implemented, it may create a tense trading environment. These banks have raised alarm on its tight policies and the urgency of implementation. Consequently, fears of increase in fees and interests to consumers are also expected.
According to Volcker, ban property trading is not part of banks activities hence there is no basis for these counter arguments. Other groups believe that the Volcker Rule is the best rule in creating environment where customers as well as the trading organizations are protected.
References
Beck, G., & Wieland, V. (2008). Central bank misperceptions and the role of money in interest rate rules. London: Centre for Economic Policy Research.
Beltrame, J. (2012). Carney’s Intervention on Volcker rule draws fire from former IMF economist Canada: The Canadian Press. Web.
Cheyenne, H. & Silla, B. (2012).Volcker Rule Will Raise Risk, Costs for U.S. Financial System, Critics Say. Web.
Quaadman, T. (2012). A Volcker Rule Primer for Non-Financial Corporate Counsel U.S. Chamber of Commerce. USA: Metropolitan Corporate Counsel.
Wieland, V. (2012). A new comparative approach to macroeconomic modeling and policy analysis. London: Centre for Economic Policy Research.