One of the most controversial parts of the summer's financial regulation bill was the so-called "Volcker Rule." Developed by former Federal Reserve Chair and departing head of President Obama's Economic Recovery Advisory Board Paul Volcker, the rule sought to forbid depository institutions from investing for their own account ("proprietary trading"). But Congress and lobbyists ended up altering the rule, watering it down to where it would be a much more lax standard for banks to comply with. Despite weakening the rule, however, new evidence indicates that it could be affecting proprietary trading in a less tangible, but still significant, way.
There were a couple complaints about how the Volcker Rule evolved in the financial regulation bill. One criticism is that the limits it set on proprietary trading were too low to have much impact. Another was that banks could find loopholes to the language used. These flaws might not be as fatal as Volcker Rule supporters thought, however. John Maggs from Politico reports that banks already noticing a change even before the rule has been put into effect:
But officials at the top banks say they are already losing talented traders to hedge funds in anticipation of the new regulations, which they say will put their clients' money at risk and leave the financial system itself less prepared to deal with the next crisis.
On Monday, two rising stars at Goldman Sachs involved in proprietary trading joined nine others who have left the firm since last fall to work at different hedge or private equity funds. All of the traders cited the diminished opportunities for earnings under the Volcker rule.
Maggs goes on to also explain that the Securities Industry and Financial Markets Association has produced a study showing market making activities will be hurt by the Volcker Rule, depending on how the final rule is implemented. If a loose definition of proprietary trading is used, then some common types of bank transactions, like buying big blocks of stock ultimately to be sold to clients, could be forbidden.