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The Volcker Rule and its Consequences for the Financial and Banking System - Essay Example

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The Volcker Rule and its Consequences for the Financial and Banking System

Federal Reserve has publicly announced that the banking system of US does not need to accept and operate according to the rule before the month of July of 2014 but the banks will have to conduct the process of “good faith planning efforts” to get ready to accept the rule in the future and during the temporary phase. As banks and the financial system is still not aware of the bans that will be levied, there will be a cloud of uncertainty that these systems will experience for two years (Ciro 2012). These systems are experiencing ambiguity in understanding what does the Federal Reserve means by good faith planning efforts. The ambiguities are making condition worse thus decision makers should make the scenario clear and present the effects of the rule on US and other nations. The cloudy situation was made clear when a draft of the regulation was prepared and this draft consisted of details regarding the services offered by financial system and the way these services are used by the common public. The situation is still quite unclear for financial institutions as even the draft wasn’t clear enough to identify the effects that the rule will have on financial sector. The European Union and other countries have even showed concerns as they expect that the rule will decrease the liquidity in world financial markets, thus it is quite clear that the rule will impact the financial systems negatively. Body The delay in implementing and clearing the effect of the rule may not help the banks and make situation worse as banks do not have the correct idea of when the rule will be implemented and banks will have to accept the rule legally regardless of whether they understand its effect or not. Legally it is stated that those banks that have operated in good faith effort during the temporary implementation phase will experience less problems in complying with the actual rule. The policy makers should make the scenario clearer instead of making the financial system of US and overseas operate according to their own guess work. The delay is making the financial system take decisions under ambiguous situation which is already hurting the system. Volcker Permitted Bank Activities According to the rule there are certain permitted activities that can be performed by the banks, these activities comprise of banks acting as market maker, underwriter, hedger, deals of government securities and other activities that are stated under the act as permitted activities. These activities have been permitted to ensure that banks continue to provide liquidity to the markets and help companies in raising capital. But these activities have been restricted to ensure that banks do not cross the line and the funds with the bank do not become unsafe. If the permitted activities cannot be conducted in a safe environment and without risky conditions, then the federal system has the right to barge banks from conducting such activities or increase charges and fines on these activities so these activities become unfavourable to the banks. The activities that have been stated as acceptable in the rule are done on the basis that the bank conducts these activities for the customer and only to meet the short term demands of the customers. Rule Effect The Volcker Rule has received its name from the Paul Volcker who was the Federal Reserve Chairman during the period of the financial crises of 2008. The ...Show more

Summary

The Volcker Rule and its Consequences for the Financial and Banking System Introduction The main purpose of Volcker Rule was to restrict banks from conducting risky activities which could possibly generate high amount of profits and losses (Liaw 2011)…
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