Financial Regulatory Reform: Implementing the Volcker Rule

Abstract

This paper explores the Volcker Rule as a response to the recent financial crisis. From drafting to implementation, the goal is to evaluate the law’s final form relative to its intended objectives. In doing so, and in investigating how that final form came about, my hope is that my work not only adds to the understanding of the Volcker Rule itself, but to the broader topic of financial regulatory reform. Through a focused study of two banks in particular, Goldman Sachs and JPMorgan Chase, and how these institutions, along with other interest groups, helped shape a law designed to limit their own ability to trade, this paper examines the role and power of lobbying in the creation of legislation. Furthermore, it examines the role of regulators in enforcing the Volcker Rule once it had been passed into law, and how their shortcomings may play a crucial role in determining the extent to which the law is able to limit banks. In the case of the law’s creation, through analysis of the Volcker Rule’s first proposal and its final iteration, along with a narrative of bank lobbying and interest group pressure, this paper finds that the law has been substantially weakened by the banks’ lobbying efforts. In terms of the regulators themselves, through a detailed study of the New York Federal Reserve, this paper concludes that there are significant deficiencies in the Fed’s work environment and professional culture. These include excessive office conformity and the “revolving door” between banks and the Fed. Deficiencies which, if not addressed, will severely limit regulators’ ability to properly oversee the depository institutions they are tasked with regulating.