If you have heard about the Volcker Rule and feel a little lost, don't feel bad. Judging by the recent attention given to the rule as the comment period came to a close, even the experts don't understand exactly how the rule works or how it would affect the capital markets; but is this something that the average banking customer should care about? Is it only going to affect the big banks or will the everyday consumer feel the impacts?
SEE: Viewing The Market As Organized Chaos

Paul Volcker is an economist and former head of the Federal Reserve. He currently heads the President's Economic Recovery Advisory Board and is credited with ending the high periods of inflation during the 1970s and 1980s. The Volcker rule is part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was drafted as a result of the 2008-2009 financial collapse, which was largely blamed on the irresponsible behavior of the banks.

The most discussed section of the rule is the ban on proprietary trading by the nation's largest banks. In other words, a bank cannot trade in the investment markets with the intent of making money, unless it is done on behalf of a customer. A bank can serve as a middleman, but not as a trader for its own benefit.

The second part of the rule attempts to put a limit on the size of the bank. This would keep a bank from becoming too big to fail. Although a 1984 rule limits a bank to a maximum of 30% of the nation's deposits, the Volcker Rule attempts to take this further so taxpayers won't have to give banks another bailout as they did in the recent crisis.

The Problem
Many people applaud the spirit of the rule. Banks were vilified when the public learned that they bet against their own customers as a way to profit on their own. The banks argued that this role was consistent with market making, but opponents weren't convinced.

The American Bankers Association estimates that it will take 6.6 million hours of work to implement the law and an additional 1.8 million hours per year for enforcement. Additionally, banks would have to hire more than 3,000 employees just to remain in compliance with the Volcker Rule. Another study found that the Volcker Rule could cost banks and investors $350 million. (To learn more, check out The Evolution Of Banking.)

The complicated nature of the law stems from what is defined as proprietary trading. Most trading of this nature is banned, but there are exceptions and then another layer of exceptions to the exceptions.

As JPMorgan Chase CEO Jamie Dimon said, "We are going to have to have a lawyer, compliance officer, doctor to see what their testosterone levels are, and a shrink, what is your intent?" Because each trade has to be analyzed, the time and cost will be huge.

Volcker's Effect on You
Although the consumer won't see a large scale direct impact, those 3,000 employees that the banks will hire may be passed on as higher fees. Some also believe that the cost of trading stocks could rise, and lower trading volume, as a result of less institutional buying, could lead to less efficient markets. With less income from trading activities, the lost revenue will have to be recouped somehow. As customers found with the CARD Act, when banks lose income, they often raise consumer fees to recoup the loss.

The Bottom Line
The Volcker Rule may be largely aimed at large banks, and although Volcker himself doesn't believe that there will be any negative effects to the consumers and the markets, some experts are not convinced. (To learn more about banks, read the Banking Tutorial)

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