Volcker Rule (2024)

FAQs

Volcker Rule? ›

The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with a hedge fund or private equity fund.

Relaxation, 2020-present

On June 25, 2020, the Volcker Regulators relaxed part of the rules involving banks investing in venture capital and for derivative trading.

“Covered funds” are investment pools that either (i) rely on exclusions from the definition of “investment company” provided by § 3(c)(1) or § 3(c)(7) of the Investment Company Act of 1940 (ICA), (ii) are commodity pools offered privately in reliance on the exemptions in 17 C.F.R.

The Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds.

The Volcker Rule contains exemptions from the prohibition on proprietary trading for underwriting and market making-related activities to the extent that such activities are designed not to exceed the reasonably expected near-term demands of clients, customers or counterparties (“RENTD”).

A bank may be excluded from the Volcker Rule if it does not have more than $10 billion in total consolidated assets and does not have total trading assets and liabilities of 5% or more of total consolidated assets.

The Volcker Shock was a period of historically high interest rates precipitated by Federal Reserve Chairperson Paul Volcker's decision to raise the central bank's key interest rate, the Fed funds effective rate, during the first three years of his term.

Provisions of the Volcker Role

The rule prevents banks from using their own accounts to engage in proprietary trading of short-term securities, derivatives, futures, and options. This rule is based on the fact that such high-risk investments do not benefit the bank's depositors.

Super 23A: Permissible Low-risk Transactions with Related Funds. The Volcker Rule generally prohibits all covered transactions between a banking entity and a covered fund that it advises or sponsors (a “related fund”).

The Volcker Rule does apply to every foreign entity that directly or indirectly maintains a bank branch or agency in the United States, or controls a commercial lending company.

What did Volcker do with inflation? ›

To subdue double-digit inflation, Chairman Volcker announced, in October 1979, a dramatic break in the way that monetary policy would operate. In practice, the new approach to monetary policy involved high interest rates (tight money) to slow the economy and fight inflation.

In his first term, Volcker focused on reducing inflation and conveying to the public that increased interest rates were the result of market pressures and not Board actions. He raised the discount rate by 0.5 percent shortly after taking office.

The Revised Volcker Rule allows a banking entity to enter into covered transactions with a related covered fund that would be exempt from the quantitative limits, collateral requirements, and low-quality asset prohibition under Section 23A of the Federal Reserve Act.

The Volcker Rule does apply to every foreign entity that directly or indirectly maintains a bank branch or agency in the United States, or controls a commercial lending company.

Institutions such as brokerage firms, investment banks, and hedge funds frequently have proprietary trading desks. However, there are restrictions against large banks engaging in prop trading, designed to limit the speculative investments that contributed the 2007-2008 financial crisis.

The intent of the Volcker Rule is to prohibit banking entities with access to the discount window at the Federal Reserve or to FDIC insurance from engaging in risky proprietary trading. It is important to keep in mind that not all financial firms are covered.

The Volcker Fed's initial inflation-fighting effort was abandoned in mid-1980 with the onset of credit controls and a recession that we believe was brought on in part by restrictive monetary policy.

During his tenure as chairman, Volcker was widely credited with having ended the high levels of inflation seen in the United States throughout the 1970s and early 1980s, with measures known as the Volcker shock. He previously served as the president of the Federal Reserve Bank of New York from 1975 to 1979.

Under Federal Reserve Board Chair Paul Volcker, the prime lending rate was raised to above 21% to reduce inflation. Inflationary pressures eased as oil prices and union employment fell, limiting the growth of costs and wages.