This is on the Volcker Rule:
My own view (and I’m a banking lawyer) is that the ban on proprietary trading will have an immaterial effect on the asset size of banking organizations. It might reduce their complexity.
An overlooked issue is that Volcker applies throughout the banking organization. That is, the ban on proprietary trading is not limited to the federally insured depository institution and restricts the activities of all of the affiliates of the depository institution. That’s a dramatic expansion in scope, with questionable policy justifications.
Another overlooked issue is that Volcker also bans investments in certain types of investment funds. Some think this is simply a ban on investments in private equity and hedge funds that is intended to avoid regulatory arbitrage around the proprietary trading restrictions. The statutory definition of covered funds was sloppy, and so the covered fund restrictions are actually much broader – and without any apparent policy purpose. This is particularly a problem for foreign banking organizations, as it looks that Volcker will have a broad extraterritorial scope.
To me, one of the more interesting aspects of Volcker is its implications for administrative law. There are many who would prefer that Congress delegate less to the administrative agencies and instead legislate with particularity. The Volcker experience suggests that might not always work well. The statute defines “private equity and hedge fund,” “proprietary trading,” “solely outside the United States,” etc. with particularity, but those definitions are generally not well-connected to the underlying policy concerns. The statutory language really left the regulators with few options to salvage a good and sensible rule. We probably would have been better off had Congress deferred more to the agencies here.
Finally, as a general matter, the difference between “security” (subject to the proprietary trading ban) and “loan” (not subject) probably isn’t a distinction that matters when it comes to the safety and soundness of banking organizations. Stepping back a bit, it’s hard to imagine what, why and how Volcker is up to.