Monthly Archives: August 2019

Banks and the Volcker Rule — a “small” victory

One year after the Federal Reserve and its sister regulators deep-sixed the Volcker Rule, the banking barons who benefited from federal bailouts and a decade of Dodd-Frank regulations that crushed their smaller competitors are wondering how they missed out on the gravy train.

“Wall Street spent years” fighting the rule, writes Francine McKenna in MarketWatch, “but small banks win the most relief in Trump regulatory rewrite.”

The irony is rich. The purpose of the rule was to protect against system risk — not allocate burdens. But in fact, the Volcker Rule, like almost any regulation, imposed a greater burden — as a share of total costs — on small community banks than it did on the too-big-to-fail brigades.

This was truly perverse, especially in light of the fact that the best scholarship on the subject indicates that it’s larger institutions that pose greater system risk in the event of failure. The primary result of Dodd-Frank, a measure designed to punish banks “too big to fail,” was to drive nearly half the small community banks out of business, while profits, stock shares, and capitalization of the big banks soared.

Then again, the term “Volcker Rule” itself, and its substance, has a smokey, bitterly nostalgic aroma. The Volcker Rule was a response by Volcker and other regulators to the financial crisis that reflected monetary chaos they helped bring about in the early 2000s. In this, it resembles the Smithsonian Accords that blew up the Bretton-Woods monetary order; the G-7 monetary coordination effort that was a response to exchange rate chaos; and other start-a-fire-and-then-try-to-put-it-out solutions of the last 50 years.

The Volcker Rule was a second-best part of a first-worse solution to monetary chaos in the early 2000s. It won’t be missed, especially if policy-makers replace rule-writing fiat with a national and global monetary rule.

In the words of George Shultz — one of Volcker’s collaborators in the wanton monetary destruction of the 1970s and beyond — “If they’re too big to fail… make them smaller.”