Volcker Rule (2024)

The Volcker Rule refers to a broad set of rules adopted under Dodd-Frank Title VI that attempts to reduce risk within banking institutions, stemming from mixing investment banking and commercial banking. The Volcker Rule consists of two major parts: rule preventing banking institutions from partaking in proprietary trading from their own funds and limiting banking institutions from investing in hedge funds or private equity funds.


After the Global Financial Crisis (GFC), financial regulators began critiquing the riskier investments from banking institutions that caused the crisis. One major source of this risk involved banking institutions conducting proprietary investments in different kinds of funds, pooled assets, and other risky, high-profit investments. Until legislative efforts in the 1990s to repeal the Glass-Steagall Act, investment banking and commercial banking was required to be separated from each other. This prevented the kind of combination between consumer deposits and risky investments that contributed to the GFC. After the crisis, financial regulators in the U.S. and around the globe attempted to bring back some of the separations between investment and commercial banking. Since its enactment, the Volcker Rule has faced a variety of critiques, particularly about its effects on restricting capital and limiting bank profits. As a result, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA) loosened many of the restrictions of the Volcker Rule.

Prohibition on Proprietary Trading

This rule prevents banking institutions from making proprietary trades in most circ*mstances. The prohibition against proprietary trading applies not only to banks themselves but also to bank holding companies. Proprietary trading here is very broad, including almost all securities, derivatives, and futures. The rule allows for some exceptions for underwriting, market making activities, risk-mitigating hedging, U.S. government and limited foreign government obligations, and investing in foreignbanking institutions. The exceptions in many circ*mstances require reporting and explanations for the applicability of the exceptions. Also, in all circ*mstances, the trading must not involve overly risky activity and must not create a conflict of interest.

The EGRRCPA added a major exception to the proprietary prohibition for smaller banking institutions. The Act allows banks to invest up to 5% of their assets in proprietary trading if the bank and their owners control less than $10 billion in assets.

Prohibition Against Investment in Covered Funds

This rule prevents banks from owning or entering into certain partnerships with “covered funds,” such as hedge funds and private equity funds. Title VI defines covered assets as any entity that is prevented from being an investment company by section 3(c)(1) or 3(c)(7) of the Investment Company Act. There are also a range of specific exceptions including for investing in covered funds that have a general purpose such as acquisition vehicles, joint ventures, foreign funds offered abroad, and some insurance accounts amongothers. This rule also has similar exceptions to the prohibition on proprietary trading that allow limited exceptions for investing in covered funds when the bank is organizing the fund, underwriting, hedging against risk, insurance activities, or for activities occurring completely outside the United States.


The Volcker Rule also has an important compliance aspect that depends on the size of the bank. The main component of the rule requires an internal compliance program be created in each bank that ensures limits are followed, documentation is kept, and any reporting requirements be met. Large banks and those with large investment operations must meet higher compliance, prudential, and monitoring requirements. The Volcker Rule divided banks between smaller, mid-size, and larger size banks and could be triggered automatically if banks have a certain amount of assets. The EGRRCPA changed this by creating the $10 billion asset exception and raising the limit for mid size banks to $250 billion, reducing the amount of banks that fall under the heightened compliance requirements.

[Last updated in November of 2022 by the Wex Definitions Team]

Volcker Rule (2024)


What is not permitted under the Volcker Rule? ›

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

What is the full 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.

Why is the Volcker Rule good? ›

The Volcker Rule protects you by limiting the kinds of risks that your bank can take. This makes it less likely that your bank will make bad bets, leading to losses, insolvency and other negative financial implications.

Is the Volcker Rule still in effect? ›

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.

What activities are prohibited by the Volcker Rule? ›

The final rule prohibits banks from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rule also imposes limits on banks' investments in, and other relationships with, hedge funds or private equity funds.

What is the exemption for the Volcker Rule? ›

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.

Is prop trading illegal? ›

A broking firm trading on its own money is called Prop trading. Suppose the broking firm allows customers to trade on their own money by collecting a deposit as security and having a profit share. In that case, it is as illegal as possible, especially since this is also done to circumvent the leverage restrictions.

What qualifies as a covered fund under the Volcker Rule? ›

Loosely put, the Rule defines a covered fund as anything considered an investment company in the Investment Company Act, including private equity and hedge funds, as well as commodity pools with certain exclusions, and funds sponsored by a US banking entity where the affiliate holds ownership interests.

What financial instruments are under the Volcker Rule? ›

As used in the Volcker Rule, financial instruments consist of the following: securities, including options on securities; derivatives (including swaps and security-based swaps), including options on derivatives and forwards;7 or. commodity futures, or commodity futures options.

Did Volcker cause a recession? ›

The prime rate rose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%. In addition to the rises in key interest rates, the so-called 'Volcker shock' included monetarist-inspired policies, such as monetary targeting.

What is the Dodd Frank and Volcker Rule? ›

The Volcker Rule refers to a broad set of rules adopted under Dodd-Frank Title VI that attempts to reduce risk within banking institutions, stemming from mixing investment banking and commercial banking.

Are banks allowed to do prop trading? ›

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.

How did Volcker stop stagflation? ›

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.

What is the super 23A rule? ›

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”).

What is the rentd Volcker Rule? ›

The Volcker rule restricts US insured depository institutions from engaging in proprietary trading of securities, derivatives and commodity futures, or options on any of these instruments. Banks have to prove that all positions are needed to meet reasonably expected near-term demand (RENTD) from clients.

What are the exclusions for covered funds? ›

The Final Rule modifies the “covered fund” exclusion for loan securitization vehicles that (a) issue asset-backed securities and (b) hold only: (i) loans; (ii) certain rights and assets that arise from the structure of the loan securitization or from the loans supporting a loan securitization, including cash ...

What is subject to the Volcker Rule? ›

The Volcker Rule generally prohibits a banking entity from entering into transactions with a related fund that w ould be a covered transaction under section 23A of the Federal Reserve Act if the banking entity w ere a member bank and the fund w ere its affiliate.

What do banking regulations prohibit? ›

U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation laws (for example, defining what constitutes usurious lending).

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