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Volcker and You

December 11, 2013

There was a vote that happened today that could very possibly have a dramatic impact on the business environment, but that might slip under the radar during this holiday season. Today, there was a major vote occurring regarding the so-called Volcker Rule. While this might not be a household term, this rule, and its potential passage, has the potential to radically redefine the banking industry as a whole. Paul Volcker is the former head of Federal Reserve, and the former Chairman of Economic Recovery Advisory Board established in the aftermath of the financial crisis. This rule, which is considered tough (although the definition of tough depends on who is asked) will redefine and limit what financial institutions can do in terms of proprietary trading.

What is proprietary trading?

In basic terms, proprietary trading, or “prop trading,” occurs when financial institutions have excess deposits over loans – this is known as “dry powder.” Banks and financial institutions, because they do not have loan possibilities that they find profitable, need to find other ways to deploy these deposits. One way that this occurs is by trading stocks and bonds – sometimes not related in a material way to the loan portfolio of the institution. Some argue that the proliferation of prop trading by the nation’s largest financial institutions led to some of the excess leverage and risk taking that preceded the financial crisis.

So, what does less prop trading, and the passage of the entire Volcker rule, mean for you?

1) If banks are discouraged from prop trading, will they be more likely to extend more questionable loans in order to compensate?
2) Will the additional hiring in compliance and risk-management jobs reduce the overall market for financial professionals?
3) Will the lack of investment options cause these institutions to earn less money, possibly leading to lay-offs?
4) Are banks going to become less likely to accept new deposits if they cannot deploy them as they see most profitably?

Just a few things to think about.


From → Discussions

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