The Volcker Rule explained

remember 2008 financial markets taking a big hit overnight following the fall of us investment giant Layman Brothers bad bets on the housing market sunk Giants of Wall Street this is absolutely stunning Wall Street has seen very very few days like this in response Congress and President Obama signed the most significant financial Reform Act of the century The Dodd Frank act it touches on everything from banks have enough Capital to how your credit card bills look to building entirely new regulatory bodies it is no secret to this group that consumers need good information but there's this one part specifically designed to stop Banks from making the same kind of mistakes that led to 2008 the voker rule here's what it is it's named for this guy Paul voker he's the former chairman of the Federal Reserve essentially it's meant to stop Banks from acting like hedge funds from making risky Bets with their own money that could ruin the foundations of the American Financial system Paul vuler knew that a bank failing is very different than any other kind of company failing because Banks play by different rules they're essentially subsidized by the government the government learned the hard way in 1929 that economic downturns can cause Banks to go under which can lead to economic Calamity since then the government has insured Banks and this is no secret the banks know the government has their back if a bank knows that no matter what happens the government is there to bail it out they'll take risks if you don't have health insurance you probably don't want to ride a motorcycle but if somebody else is already paying for your health insurance you might want to ride a motorcycle so here's what the rule does first it only applies to Big commercial and investment Banks Banks with over $50 billion in capital and it stops those Banks from directly owning or investing in private Equity or hedge funds well almost completely they can still own up to 3% second it stops those Banks from propri AR trading this is when a bank makes trades with its own profits instead of with money that clients have given them to invest so normally a bank takes money from a client trades it and then makes its money by charging fees or taking a percentage of the earnings a little off the top these profits are modest but steady prop trading is different prop trading is With A bank's own money these trades are highly complex highly risky and can be incredibly profitable because the money that's being traded is entirely the banks no clients so all of the profits go to the bank there's no skimming off the top they're taking the whole thing but with those huge profits can come huge losses if a bank makes a Bad Bet say underwriting subprime mortgages during a housing bubble the bank is on the hook for everything and those losses can be so big they can shake the entire foundation of the bank including those regular old deposits held by customers and remember if a bank fails the government has to bail them out many on Wall Street have been longtime critics of the vocer rule they say that it makes Banks less competitive in the global economy because it's true they've had to give up hundreds of billions of dollars in potential profits but Advocates of the vocer rule say that it's essential in preventing Banks from becoming too big to fail because banks are the centerpiece of the economy to have a functioning economy they need to survive the ups and downs of the markets when they're allowed to gamble with their own money it puts the whole system at risk

Channel: CNN Business

Views: 41,263

Keywords: Obama, Dodd Frank, News, CNN Business, Volcker Rule, Dodd, CNNMoney, Volcker, CNNB

Id: CiOuqGPp7Yc

Length: 3min 30sec (210 seconds)

Published: Mon Aug 22 2016