The Volker Rule, how does it work?

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Hi guys, how is everybody doing? Today I want to talk about the ‘Volcker Rule’. Did anybody heard of it on the news? As this rule came into effect very recently in last month, I want to let you find out what it is and how it works.

1. What is the Volcker rule?

The Volcker rule is one of the regulations included in the Dodd-Frank Act. This rule had been legislated in 2010, and took its effect as of 21st of July this year. Then What’s the Dodd-Frank Act? This Act was enacted in the US to solve the financial problems that occurred during the 2008 crisis. The purpose of the Volcker rule was to restrict the banks from making risky investments. To meet this ends, the Act constrains the commercial banks to carry out their role as investment banks. More details about the rule are as follows;

2. What’s the effect?

As told above, the Volcker rule was introduced in the United States. You may wonder, “So, what’s the effect of this rule to us not in the United States?” Even though the rule takes its effect in the US only, the rule applies to ‘foreign banks’ that operate their intranational branch in the US. That is, regardless of the nationality of a bank, the rule applies to any bank having the US branch.

Originally, at the time of enactment, the rule was to affect the US banks only. However, after a few cases such as JP Morgan’s loss case, the rule was questioned and more complicated. Finally, it was decided that the effect of this rule should be stretched out, making ‘all the banks’ in the US affected by the rule. What does it mean? Every international branch operating in the US is under this rule, which means the global financial market is influenced by it. According to this, there are both positive and negative impacts.

3. How do we respond to the rule?

Since 5th of June, a special task force has been operated by the financial authorities in cooperation with Korea Federation of Bank and other domestic banks. This task force examines the Volcker rule closely to predict it’s effects on financial market and design proper measures and responses

Isn’t it interesting that the global financial market is so closely connected? A rule in one country is no more just domestic, but its effect extends to other countries. With the special task force, the FSC will keep working on implementing effective measures to respond to this global trend.

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