In order to avert yet another financial crisis, the final
version of the Volcker rule is expected to be released by U.S.
regulators at the end of 2012, Reuters reported on Tuesday. This
rule has been framed with the aim of reducing capital investments
by banks in high-risk bets. Moreover, banks have to adhere to the
new regulations as soon as they are introduced.
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Volcker Rule - a specific section of the Dodd-Frank Wall Street
Reform and Consumer Protection Act - requires banks to restrict
their investments in hedge funds and private equity funds. The
proposition of the rule demands trimming down of investments in
each private equity and hedge fund to 3% or less of net asset
value. Further, total investments in all such funds should not
exceed 3% of Tier 1 capital. Moreover, proprietary trading is
prohibited under this rule.
U.S. regulators working on the rule include the Federal Reserve,
the Securities and Exchange Commission, Federal Deposit Insurance
Corporation, the Commodity Futures Trading Commission and the
Office of the Comptroller of the Currency. These agencies are
working hard to implement the rule and aims to steer banks to
completely obey the rule by July 2014.
Previously, the rule was expected to be implemented on July 21,
2012. However, it was delayed as the agencies differed over the
process of implementation of the rule. Moreover, different
viewpoints from industry groups and the public have been received
in reponse. Therefore, officials are working to resolve the issue
and publicly present a clearer picture of the rules as soon as
Further, the shares of Wall Street Biggies such as
The Goldman Sachs Group Inc.
JPMorgan Chase & Co.
Bank of America Corp.
) are suffering, owing to the uncertainty related to the Volcker
Overall, we believe that until there is ambiguity surrounding the
rule, investors will have a dim outlook on banks. They will expect
the bottom line to be pressurized owing to the negative effect of
the rule on banks.