Last year, after 5 years of discussion between various unelected bureaucrats, the controversial Volcker Rule section of Dodd-Frank came into effect. With over one thousand pages, this rule is a prime example of the overzealous rulemaking mindset that Washington is known for. It should come as no surprise that each page of this 1080-page rule is filled with regulations that hurt the American financial sector as a whole, but more importantly Main Street.

Named after Paul Volcker, a former chairman of the Federal Reserve, the Volcker Rule limits the types of trading activities that banks can engage in. Specifically, it prohibits a bank from making trades for its own accounts, also known as proprietary trading, which at the time was viewed as one of the causes of the financial crisis.

However, in the immediate aftermath of the passage of Dodd-Frank, Paul Volcker acknowledged that proprietary trading did not lead to the financial crisis. So instead of a rule that will ensure financial stability, Americans are left with a large, complex regulation that does nothing but hurt our financial sector.

  • A study published by the U.S. Chamber of Commerce, titled “The Economic Consequences of the Volcker Rule”, looked at the adverse effects of the Volcker Rule on banks and their customers. Below are a few consequences of the Volcker Rule:

    • The costs of raising capital for small businesses will increase. The Volcker Rule will lead to banks being less likely to lend money to small business, which are in most cases those most likely in need of capital.
    • American financial institutions are less competitive. With a limit on the types of trading that they can do, American banks are at a disadvantage to their foreign competitors. As a result, foreign banks will have an advantage when trying to gain new customers. 
    • Reduced liquidity in the market. By banning and restricting certain trading activities for banks, the Volcker Rule limits U.S. banks ability to generate capital that would be used to respond to customer demands. This not only limits the ability of financial institutions to adequately adapt to changes in the market, but also increases volatility as liquidity is reduced.

Shortly after the passage of the final Volcker Rule, Representative Jeb Hensarling (R-Texas) released a statement saying that it will “do nothing to help our nation overcome the slowest, weakest, non-recovery recovery since the Great Depression”.

The Volcker Rule is just another attempt by Washington bureaucrats to expand their power and influence through overzealous rulemaking. This rule, along will most of Dodd-Frank, has done nothing to help the U.S. economy or Americans, but rather continued to handicap the financial sector with crippling regulations.

Fortunately, Americans now have a solution to these anti-competitive regulations.  Last month, the House Financial Services Committee approved H.R. 5983, the Financial CHOICE Act. This piece of legislation, introduced by Representative Hensarling, undoes much of Dodd-Frank, including the Volcker Rule. By undoing key provisions of Dodd-Frank, the Financial Choice Act will add much needed stability to the U.S. economy and help spur economic growth.


Photo Credit: The White House