According to an article published today on the Wall Street Journal,"critics of the Volcker rule approved by regulators Tuesday point out that trading mishaps weren't the root cause of the financial crisis. That, to a degree, is true. If so, they argue, Volcker is a misguided attempt to shackle banks".
"Yet the rule starts to address the question of what a bank should be, or at least what activities should be backed by insured deposits, and ultimately taxpayers. Focusing on what banks do, rather than their absolute size, may prove a better way of making financial behemoths safer".
"Under Volcker, trading for a firm's own account is now mostly out of bounds, as is owning large stakes in hedge or private-equity funds. That should limit risks, even if the rule won't completely eliminate trading-related mishaps. Banks will, after all, be able to continue placing wagers on government bonds or taking trading positions in their role as market makers".
"And many will argue, with some justification, that the rule doesn't go far enough, in, for example, restricting activities related to market making. The prohibition does, though, draw a line, making it clear that banks' business is about lending, not investing.
If regulators are willing to think along the lines of what a bank shouldn't be allowed to do, that raises questions about other activities. Why, say, are banks allowed to run fund-management businesses? While these don't pose the same risks as proprietary trading, the insured-deposit backstop does give them an advantage in competing against stand-alone fund-management firms.
There is also the question, left untouched by Volcker, of why commercial banks should be in the business of market-making in the first place.
Indeed, the Volcker rule is a good, even if imperfect, start toward getting banks back to being banks. It shouldn't mark an endpoint".
