Does the Volcker rule lower risk?

That’s banks doing proprietary trading for their own accounts, which was limited by Dodd-Frank.  But have those limitations been effective?  Maybe not, at least that is what Jussi Keppo and Josef Korte suggest in their newly published paper:

We analyze the Volcker Rule’s announcement effects on U.S. bank holding companies. In line with the rule and the banks’ public compliance announcements, we find that those banks that are affected by the Volcker Rule already reduced their trading books relative to their total assets 2.34% more than other banks. However, the announcement of the rule did not reduce the banks’ overall risk taking. To keep their risk targets, the affected banks raised the riskiness of their asset returns. We also find some evidence that the affected banks raised their trading risk and decreased the hedging of their banking business.

I would not consider this the final word, but those results are hardly a surprise.  Trying to control bank risk-taking on a limited number of margins is likely to misfire, given the possibilities for other portfolio adjustments.

Most of all I find it striking how many people have strong opinions on the Volcker rule, one way or another, simply because they feel they ought to be on one “side” of the issue.