The Volcker Rule seeks to protect savings accounts
October 17, 2011
Some fights in Washington are very visible, but there are also low-profile struggles that can matter just as much in the long run--such as the ongoing debate over the so-called Volcker rule.
With the FDIC's recent approval, this provision of the Dodd-Frank financial reform act is moving toward its final draft. This will touch off a behind-the-scenes lobbying effort that could affect savings accounts across the country.
How does the Volcker Rule affect savings accounts?
The Volcker Rule seeks to curb the speculative activities of deposit banks. This means that banks cannot take the money in CDs, savings accounts, and money market accounts and engage in speculative trading or investing for the bank's profit.
This kind of activity has always been a "heads-I-win-tails-you-lose" sort of activity. When it goes well, the banks happily book the profits. When it goes badly, it endangers the bank and its deposits.
Of course, the FDIC insures those deposits, but if the FDIC has to cover for lost deposits, it costs everyone in the end. It forces the FDIC to raise the levy on surviving banks for the deposit insurance fund. This makes the banking business more expensive in general, which contributes to higher bank fees and lower CD, savings, and money market rates.
The ultimate test of Dodd-Frank
The survival of a substantial version of the Volcker Rule may be the ultimate test of the Dodd-Frank Act, because unlike some of the minutiae and misguided lashing out at banks contained elsewhere in the act, the Volcker Rule seeks to address the type of activities that put the financial system on thin ice in 2008.
So far, the most prominent outcome of the Dodd-Frank Act has been the Durbin Amendment, which recently went into effect. This capped the amount of money banks could charge retailers for processing debit card transactions. The Durbin Amendment benefits retailers rather than bank customers, and may actually hurt customers because of the new bank fees that have sprung up in reponse.
If the Volcker Rule survives intact, the Dodd-Frank Act could actually be known for protecting depositors--rather than simply for slipping an under-the-table bonus to retailers.