Preventing banks from irresponsible use of customers’ money
Problem: Wall Street banks are large firms. Accepting deposits and making home mortgages is only a small part of what the biggest banks do to make money and maximize profits for their investors. Their trading arms will also often invest in high-risk ventures that could pay big – or lose big.
There is nothing inherently wrong with banks betting their profits in order to make more money. The main problem is when banks don’t simply use their own money for these high-risk bets, but also use their customers’ money. This created two problems that led to the 2008 financial crisis and taxpayer bailout. First, it put the life savings of ordinary people – who are in no position to gamble with their money - at risk. Second, it put the overall banking system at risk because so much money was being gambled with.
Solution: The new Wall Street reform law will institute what is called the “Volcker Rule”, a reform advocated by former Federal Reserve Board Chairman, Paul Volcker. The Volcker Rule is intended to get banks out of the business of placing high-risk bets with other people's money.
Regulators at the Federal Reserve are in the process of hammering out how exactly the Volcker Rule will be implemented.
Learn more: New York Times, 10/11/11, With Volcker Rule, Wall Street Braces for Change
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