The Economic Analysis of Volcker Rule

Abstract

This paper aims to analyze the final regulations of the Volcker Rule in order to assess any lingering concerns related to the administration of the Rule. Despite the problems criticized by many practitioner and scholars, implementing the Volcker Rule has benefits for banks and the overall economy. First, prohibiting proprietary trading activities may make individual institutions and the banking system as a whole safer. Second, the prohibition on banks' ownership interest in private equity and hedge funds directly addresses a source of bank default risk - the Volcker Rule limits banks' exposure to risky private equity and venture capital activities, which are activities that contributed to banks' probability of default during the 2008 financial crisis. Third, heightened compliance standards and documentation requirements will help improve transparency of banking activities and contribute to bank stability.