VOLCKER RULE Meaning and
Definition
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The Volcker Rule refers to a regulation implemented as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Named after former Federal Reserve Chairman Paul Volcker, it aims to prevent commercial banks in the United States from engaging in proprietary trading and from owning or sponsoring hedge funds and private equity funds.
More specifically, the Volcker Rule prohibits banks from making speculative investments that do not benefit their customers. It seeks to prevent banks from taking excessive risks with depositor funds by engaging in trading activities that may lead to potential losses. This is intended to safeguard the overall stability of the financial system, reducing the potential for another financial crisis.
The rule also prohibits banks from organizing, sponsoring, or investing in hedge funds or private equity funds. By limiting their involvement in riskier investment activities, the Volcker Rule aims to protect depositors' funds from being exposed to high-risk endeavors.
To ensure compliance with the Volcker Rule, banks are required to establish internal controls and procedures to monitor and limit their trading activities. They must also report regularly to regulatory agencies regarding their adherence to the rule and provide evidence that their activities are consistent with permissible activities.
The Volcker Rule aims to separate traditional banking functions, such as lending and taking deposits, from more speculative trading activities in order to reduce systemic risk and protect the economy from financial downturns.
Etymology of VOLCKER RULE
The term "Volcker Rule" is derived from the name of Paul A. Volcker, an American economist and former Chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan. The Volcker Rule was proposed as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the financial crisis of 2008. It aims to restrict banks from engaging in certain speculative activities for their own profit, with the intention of reducing the risk of future financial crises.
