WASHINGTON (AP) — U.S. regulators have approved a rule that seeks to defuse the kind of risk-taking on Wall Street that helped trigger the 2008 financial crisis.
The Volcker Rule is expected to change the way the largest U.S. banks do business. It strives to limit banks' riskiest trading bets that could implode at taxpayers' expense. Some think the rule goes too far, others not far enough.
Here are questions and answers about the Volcker Rule:
Q: What is it?
A: The Volcker Rule is a key plank of a financial regulation law enacted in 2010 to try to reduce the likelihood of another crisis and a resulting government bailout. The rule is intended to bar banks from trading for their own profit. This activity is known as proprietary trading. It's become a huge money-making machine for mega Wall Street banks, like Goldman Sachs, JPMorgan Chase and Morgan Stanley. Under the rule, the banks will be required to trade mainly on their clients' behalf.
Still, if it were that simple, the final draft would be a lot shorter than its roughly 920 pages — about as long as Dostoyevsky's "The Brothers Karamazov." The rule left to regulators the burden of finalizing the fine print.
Besides curbing proprietary trading, the Volcker Rule limits banks' investments in hedge funds and private equity funds, which are high-risk, lightly regulated investment pools.
The rule is named for Paul Volcker, a former Federal Reserve chairman who was an adviser to President Barack Obama during the financial crisis. Volcker urged a ban on high-risk trading by big banks to diminish the likelihood that taxpayers might have to rescue them, as they did after the financial crisis.
Q: Where are the complications?
A: The ban on proprietary trading isn't absolute. There are exemptions. One involves an important activity called market making. When big banks engage in market making, they use their own money to take the opposite side of a customer's trade: They buy or sell an investment to help execute the trade.