Red Tape Regulations Man

Newscom

Slate seems to have picked up on a classic regulatory problem that relates to the (still being finalized) version of the new Volcker Rule.

The problem? Regulations often sound reasonable but are practically impossible to implement.

Officially, the 2010 Wall Street Reform and Consumer Protection Act (known as Dodd–Frank) required five separate regulatory agencies to jointly craft regulatory rules for the “Prohibitions and Restrictions on Proprietary Trading.” The idea—which sounds perfectly reasonable—is that financial institutions that hold federally insured deposits shouldn’t be allowed to use those funds to speculate in risky investments.

In practice, though, it’s very difficult to legally separate “speculative” activity from what banks normally do. And, in general, the fact that banks use deposits to make commercial and consumer loans is, by nature, speculative.

Slate favors crafting a very strict rule that would clamp down on a wide array of activity, arguing that a lax rule won’t get stricter over time. But this approach ignores the general direction of regulatory activity, which grows over time, becoming more restrictive. Perhaps the fact that regulators still don’t have the rules completed after nearly three years indicates that more regulation isn’t the answer? It certainly hasn’t been a magic bullet.