In the news: Reforms to the structure of banks have been implemented (or are still under discussion) in most advanced countries (Vickers, Liikanen, Moscovici-Berger). Last week, four IMF researchers published a report outlining the potential harmful effects of these banking reforms in the absence of international coordination.
The Volcker Rule is one of the many provisions of the Wall Street Reform and Consumer Protection Act (2010), better known as the Dodd-Frank Act. It has two components.
The first stipulates that a bank may not engage in proprietary trading; that is, without the formal consent of a client, no speculative transactions or negotiations may be carried out using the client’s resources. There are a few exceptions to this, notably when the transaction involves U.S. Treasury bills.
This rule also states that a bank may only invest in hedge funds and private equity funds to a limited extent. Thus, banks’ investments and sponsorship of hedge funds and private equity funds are limited to 3% of the Tier 1 capital of the bank concerned and capped at 3% of the capital of the funds.
Victor L.
