The Volcker rule, CCP resolution and systemic risk measures

April 21–27, 2017

VOLCKER RULE under fire

CCP RESOLUTION needs to be frightening

G-SIB RISK MEASURE up for revision


COMMENTARY: The Volcker rule

You lose respect for laws, as you do for sausages (said the US poet John Saxe) once you’ve seen them being made. The Volcker rule, banning proprietary trading by any US banks depending on federal deposit insurance or access to the Fed discount window, has been under fire since its inclusion in the Dodd-Frank Act was announced back in January 2010. This week, revealed the untold story of exactly how it got in there in the first place – as part of a tricky political balancing act driven by a shock election loss in Massachusetts, public pressure for financial reform, and the convoluted and territorial process of lawmaking in the US Congress.

Insiders say the Volcker rule was a last-minute addition, aimed at pacifying the final few Democratic holdouts in the Senate needed to get the bill past a Republican minority blocking manoeuvre. As with the Lincoln Amendment, another contentious addition to the bill, another motive seems to have been to strike a balance between the competing fiefdoms of Banking and Agriculture, both of which (through their oversight of rival financial regulators) had something to lose in this particular fight.

Two years ago, major banks were confident they were ready to comply with the Volcker rule when it came into force in July 2015. But now the atmosphere has changed. Banks across the country are complaining the rule’s complexity makes it unworkable, and few in the regulatory community or the US government are willing to defend it. Its architect, former Fed chairman Paul Volcker, is the loudest voice still left on the rule’s side, arguing that, whatever the cost of compliance, the effect on banking culture has already been hugely beneficial.

US Treasury Secretary Steven Mnuchin backs the rule’s general intent, but favours changing the definition of prop trading, he said last week. This is a softer line than that taken by other newcomers such as incoming Commodity Futures Trading Commission chairman Christopher Giancarlo and newly confirmed Securities and Exchange Commission chairman Jay Clayton, who have stated their intention to eliminate or simplify existing Dodd-Frank rules – although many believe completely repealing Dodd-Frank is an unrealistic aim.

Even Mnuchin’s proposed tweaks to the rule’s definitions would have to pass through the same contentious process as the rule itself did seven years ago, shepherded this time by a distracted administration with a very different approach to lawmaking compared to its predecessor. Sausage-lovers should look away now.



For 2015, according to estimates by researchers at the US Federal Reserve, the banking system would have needed at least €175 billion more common equity to survive – without bailouts – a financial crisis similar to that of 2007 to 2009. The bulk of the capital shortfall is accounted for by a very small number of globally systemically important banks that rely heavily on short-term funding.



Libor is a sick man. At some point, it may be necessary to place him on life support – but he can’t be allowed to expire any time soon – Darrell Duffie, Stanford University

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