Federal regulators in early October proposed new regulations aimed at stopping banks from trading for their own profit.
The so-called Volcker rule, named after former Federal Reserve Chairman Paul Volcker, is part of the Dodd-Frank Act, the sweeping financial-reform law approved by Congress in 2010.
While high finance and hedge fund investments may seem far removed from your everyday life, consumer advocates and analysts say the stakes for the new law are high. Ultimately, the outcome matters to your pocketbook. Already, JPMorgan Chase, Goldman Sachs and Morgan Stanley have closed or announced plans to shut down their proprietary trading divisions in anticipation of those activities being banned.
With the Office of the Comptroller of the Currency accepting comments on the proposal through Jan. 13, here's your chance to weigh in on guidelines for the U.S. financial system. The Volcker rule could affect your financial life in several ways.
Promoting bank stability
The overriding aim of the Volcker rule is to promote stability in the banking system and help prevent a repeat of the financial crisis in 2008. The collapse of Lehman Brothers and the near collapse of American International Group, or AIG, prompted Congress to approve an unprecedented $700 billion government bailout in 2008.
"At the end of the day, what this ought to do for consumers is lower the risk of defaults that we saw and maybe make financial institutions easier to regulate," says David Min, the associate director for financial markets policy at the Center for American Progress in Washington, D.C.
By forcing banks to stop trading for their own accounts, the rule will limit the amount of risk these mammoth institutions take on, making another financial scandal less likely. "We won't have this kind of financial blowup again, which is good for everyone," Min says.
"This speculative activity drives a bit of a 'heads I win, tails you lose' approach," he says. If banks must compete based on the banking, checking and lending services they provide -- as opposed to the revenue they can generate from proprietary trading -- consumers should benefit.
Banks focus on banking
The Volcker rule aims to make banks focus on their core products and services rather than on racking up profits from exotic trading strategies and the complex financial products known as derivatives. If successful, that effort could improve services for customers and lessen the risk of deposits being lost because of the volatile world of high finance.
Before the banking crisis came to the forefront in 2008, traders and investment bankers had focused too much on boosting profits and reaping fat annual bonuses as a result, rather than concentrating on core banking functions, consumer advocates say.
"What is the financial system's job? Is it to provide capital for business, homeownership and economic growth, or is it to generate extremely high bonuses for its senior employees?" asks Lisa Donner, the executive director of Americans for Financial Reform in Washington, D.C. "We had moved to a world where the latter was too much the case."
