The Volcker Rule was first proposed in 2009 to restrict systemically important banks from engaging in proprietary trading that poses high risks. It threatens to eliminate a major source of revenue for large banks by prohibiting speculative trading done for the bank's own benefit rather than for clients. The rule is still in the implementation stage, with regulatory agencies soliciting public comments to help shape the final regulations, which gives the agencies broad discretion. Large banks have an interest in influencing the rule-making process but the rule is still likely to pass in some form due to public outrage over bank bailouts and a desire to prevent future crises caused by risky trading.

1. Case no 3– VolkerRule
Qno 1. In this case,at what stage in its life cycle is the nonmarketissue of the “Volckerrule”
(regulationofproprietary trading)?
Ans-:
The "Volckerrule"wasfirstproposedinaJanuary 2009 reportcowrittenbyVolckerandthe Group of
Thirty,an international groupof seniorrepresentativesfromacademia,government,andbusiness.
Accordingto the report,"large,systemicallyimportantbankinginstitutionsshouldbe restrictedfrom
engaginginproprietaryactivitiesthatpose particularlyhighrisks."Banks,unlikeotherfinancial
institutions,were FDIC-insured.
 Thisinsurance ensuredthatbankswouldbe bailedoutif theywere introuble.Withthe FDIC
bearingthe riskof bad decisions,banksmaybe enticedtospeculate fortheirownaccount.
 If the speculationlostenoughmoneytoputthe institutioninjeopardy,the costsof the decision
wouldbe borne bythe public(viathe FDIC).Thiswas referredtoasmoral hazard.
The solutiontothismoral hazard issue wasto prohibit banksfromtradingontheirownaccount. "If
you're goingto be a commercial bank,withall the safeguardsthatentails,youshouldn'tbe doingthis
stuff,"Volckersaid.If you're doingthis,youshouldn'tbe workingforacommercial bank.
 The Volckerrule threatenedtoeliminate banks'proprietarytradingrevenues,orrevenuesfrom
tradesthat banksconductedfortheirownbenefitratherthanthe benefitof theirclients.The
proprietaryportionof tradingrevenueswasdifficulttocalculate,butitwasestimatedtobe
around10% of total tradingrevenues.
 At that rate,the six largestAmericanbanks'proprietarytradingrevenuesin2010 wouldhave
surpassed$5.9 billion.
 The major stepthat enragedpeople,however,wasthe use of the moneyto bail outa varietyof
private financial institutions.Peopleexpressedtheiroutrage atthe decisionbysending
threateninge-mailstoemployeesandbanks.Atthispoint,asystemlike Volcker'swasrequired.
 The so-calledMerkley-Levinamendmentexplicitlyexemptedtradingingovernmentbondsfor
market-making,hedging,andunderwriting.Furthermore,the amendmentincludeda
"indefinite"exceptionforanyactivitiesdeemedbyfederalbankingregulatorstopromote "the
safetyandsoundnessof the bankingentity."Banks shouldsupportthisamendmentbecause it
putsthemin a betterposition.
 Accordingto administrative protocol,these agencieswouldfirstpublishanotice of proposed
rulemakingandsolicitpubliccommentstohelpshape the regulations.These commentswould
be consideredinfluential insofarastheyaddressedspecifictechnical issuescompetently.
 The amendment'sgoal wasto keepthe $5 billionin"speculativeprofits"outof the banking
systemwhile still allowing"good"financial activity.However,becausethe linebetweenmarket-
makingor hedging(good) andspeculative(bad) activitieswasnotclearlydefined,the
amendmentgave the agencieschargedwithimplementingthe Dodd-FrankActbroad
discretionarypowers.Thisneedfordiscretionwaswidelyacknowledged,asDeputyTreasury
SecretaryNeal Wolinstatedata Senate BankingCommitteehearingonFebruary2,2010.

2. Qno 2. Map out the interestsand theirpotential influence.Isthe Volckerrule likelyto pass? Why,or
why not?

3. Qno 3. Propose a nonmarketstrategy for a large bank to deal with the threat of the Volckerrule.
Make sure the strategy looks not only at the current stage of the issue but at future stagesas well.