The “Volcker Rule”: Proposals to Limit “Speculative” Proprietary Trading by Banks

David H. Carpenter
Legislative Attorney

M. Maureen Murphy
Legislative Attorney

In 1933, during the first 100 days of President Franklin D. Roosevelt's New Deal, the Securities Act of 1933 and the Glass-Steagall Act (GSA) were enacted, setting up a pervasive regulatory scheme for the public offering of securities and generally prohibiting commercial banks from underwriting and dealing in those securities. Banks are subject to heavy, expensive prudential regulation, while the regulation of securities firms is predominately built around registration, disclosure of risk, and the prevention and prosecution of insider trading and other forms of fraud. 

While there are two distinct regulatory systems, the distinguishing lines between the traditional activities engaged in by commercial and investment banks became increasingly difficult to discern as a result of competition, financial innovation, and technological advances in combination with permissive agency and judicial interpretation. 

One of the benefits of being a bank, and thus being subject to more extensive regulation, is access to what is referred to as the "federal safety net," which includes the Federal Deposit Insurance Corporation's (FDIC's) deposit insurance, the Federal Reserve's discount window lending facility, and the Federal Reserve's payment system. 

In the wake of the Great Recession of 2008, there have been calls to reexamine the activities that should be permissible for commercial banks in light of the fact that they receive governmental benefits through access to the federal safety net. Some have called for the reenactment of the provisions of the GSA that imposed affiliation restrictions between banks and securities firms, which were repealed by the Gramm-Leach-Bliley Act (GLBA) in 1999. 

While neither the House- nor the Senate-passed version of H.R. 4173, the comprehensive financial regulatory reform proposals of the 111th Congress, includes provisions that would reenact the GSA, both bills do propose curbs on "proprietary trading" by banking institutions. H.R. 4173, newly titled the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is modeled on the Senate version, would limit the ability of commercial banking institutions and their affiliated companies and subsidiaries to engage in trading unrelated to customer needs and investing in and sponsoring hedge funds or private equity funds. Such an approach has been referred to as the "Volcker Rule," having been urged upon Congress by Paul Volcker, former Chairman of the Board of Governors for the Federal Reserve System and current Chairman of the President's Economic Recovery Advisory Board. 

This report briefly discusses the permissible proprietary trading activities of commercial banks and their subsidiaries under current law. It then analyzes the Volcker Rule proposals under the House- and Senate-passed financial reform bills and under the Conference Report. Appendix A, Appendix B, and Appendix C of the report provide the full legislative language in each.


Date of Report: June 30, 2010
Number of Pages: 60
Order Number: R41298
Price: $29.95

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