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The problems with the Volcker Rule

Former Federal Reserve Chairman Paul Volcker arrives at a House Financial Services Committee hearing on Capitol Hill on Sept. 24, 2009 in Washington, D.C.

Jeremy Hobson: In Washington, a piece of the financial reform law that was passed last year is having a tough time getting implemented. I'm talking about the Volcker Rule.

Here to explain is our David Brancaccio special correspondent for our Economy 4.0 team -- which is looking into how the economy can better serve more people. David, Good morning.

David Brancaccio: Good morning.

Hobson: So first of all, David, remind us: What is the Volcker Rule?

Brancaccio: Paul Volcker, former Fed chairman, has been pushing for this. He doesn't want banks to take big risks with their own money because it becomes our money -- taxpayer money -- if their bets go bad and they need a government bailout. So the idea not too complicated, but I talked to Andrew Sheng, he's the chief adviser to China's banking regulatory commission, and he put it this way:

Andrew Sheng: Well, there's an old Chinese saying, which is the guest should not become the host.

So everybody has a role to play. The banks should play the role of serving as agents for their clients -- not making big bets on their own behalf, serving as their own agents.

Hobson: OK, so this idea sounds pretty simple -- banks shouldn't be taking bets with their own money. Where are we with it?

Brancaccio: There was supposed to be a rule this week, and all there is is a draft rule this week. It's 300 pages long, I'm looking at it right now.

Hobson: A ha, so not exactly a short, sweet and simple.

Brancaccio: No it's not simple, and it has some interesting exceptions, exemptions. For instance, let's say a client goes to its financial services company, a bank, and says, 'I want you to sell a security for me.' And no one wants to buy a security that day, so maybe the bank buys it, just to be nice to the client. That's called market-making. But it's not so easy to distinguish this market-making from something the Volcker Rule is trying to stamp out, where the bank is buying it on a bet, the price will go up. Satyajit Das is an expert on risk and banking, and he talked about this market-making exemption.

Satyajit Das: In fact, a derivative lawyer summed it up very well for me. He said, 'You know, looking at this exemption, I would be embarrassed if I couldn't ensure that everything you do falls within the market-making exception.'

Hobson: So it sounds like the Volcker Rule may have its own problems. Is it time to give up on it?

Brancaccio: Well there's a lot at stake to give up on. The whole idea is to make the financial world a safer place for all of us. This is a draft rule, people can comment on it. Financial companies will be lobbying like the Dickens to hold onto the potential to make big money internally.

Hobson: Marketplace Economy 4.0 special correspondent David Brancaccio. Thanks David.

Brancaccio: You bet.

About the author

David Brancaccio is the host of Marketplace Morning Report. Follow David on Twitter @DavidBrancaccio

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