Federal regulators are expected to give final approval this week to the so-called Volcker Rule, which bars banks from making risky investments with the insured deposits they're holding for customers. To protect against having to bail out depositors in the event of a giant bank failure, it makes sense to set clear limits on what banks can do with the assets that the federal government guarantees. But the contention surrounding the Volcker Rule illustrates how hard it is for regulators to translate simple concepts into real and effective rules.
The subprime mortgage meltdown and ensuing credit crunch led some to call on
The Volcker Rule was exactly the sort of thing businesses tell Washington they need from regulators: a clear line dividing legal and illegal activity. It told banks that they could not engage in "proprietary trading," meaning they could buy and sell securities, derivatives or other risky financial instruments only at a client's request and with the client's money.
That simple construct didn't map well to the complex modern banking industry, however. So Congress and regulators exempted certain proprietary trades, including those that involved little risk (for example, buying and selling government securities) and those done to hedge clients' bets. And what began as a three-page proposal from former