The Volcker Rule: A Brief Political History

Today, more than five years after Dodd-Frank was first signed into law, uncertainty surrounds many aspects of the Volcker Rule’s application and ultimate impact on financial markets and bank stability. Many more years will likely pass before that uncertainty is resolved. We demonstrate through a quantitative and qualitative analysis that these difficulties were presaged by the Volcker Rule’s political history. The Volcker Rule -- originally rejected by Congressional lawmakers and economists within the Obama administration as unworkable -- arose as a political concession designed to quiet critics who contended that Dodd-Frank did not do enough to control risky bank activity. But deep divisions about the proper scope of the rule persisted even as the statute was signed into law, ensuring that these debates continued into the rulemaking phase. Efforts to influence the Volcker Rule at the agency level began immediately after presidential signing and persisted until enactment of the final rule. Those expressing an opinion on the rule included affected industry members, academics, public interest groups, private individuals, and state and foreign governments, among others. Systematic analyses of meeting logs and comment letters reveal that much of this activity involved the market making exemption. Specifically, commenters disputed how broadly the exemption should be interpreted and applied, the extent to which limitations on banks’ abilities to make markets would reduce market liquidity, and the likely costs of any such reduction, should it occur.