The recent fears that seemed to be fuelled by a panicking media have been alleviated with Morgan Stanley and Goldman Sachs share prices rising overnight. The ‘impending doom’ never seemed to crystallise, with some even predicting the Volcker Rule could have had a worldwide affect.
The rule is listed as part of the 2010 Dodd-Frank financial law that is aimed at shaking up and regulating Wall Street. In the aftermath of the Global Financial Crisis, it aims to put a stop to banks making risky bets with taxpayer-guaranteed deposits. The US regulators have banned proprietary trading, the act of banks trading on their own account, which was a key factor that led to the financial meltdown in the first place. Most notably the banks now also have to spend more on compliance and makes sure that they don’t reward “prohibited proprietary trading” to any traders.
The two banks with the most important trading operations passing this test unaffected is a real boost of confidence to a still recovering market. Wall Street has been facing hard times trying to gain back the trust of the populous. The Volcker ruling – named after the former Fed chairman Paul Volcker – has been a long time coming, and the truth of the matter is, most of the banks have already complied. Most famously Bank of America boss Brian Moynihan said his bank ended proprietary trading two years ago. “That’s not a big part of our company” he stated to investors at a conference in New York. Investors have seemed to shrug off the ruling with Goldman Sachs share price climbing 1.23 per cent overnight, joined also by 1.25 per cent for Morgan Stanley. Both of these giants are proving to be in the stride of strength, with Goldman up 45 per cent in the last year but proving no match for Morgan Stanley with 80 per cent.
There are concerns however that the ruling may have little standing, as the banks are still able to continue market-making, a similar process to proprietary trading, except with their client’s money. The US banking lobby is said to continue opposing the Volcker rule, with rumours hinting they may soon mount a legal challenge. Although it has been given its blessing by US regulators, the rule has been delayed into action until July 2015 as a result of pressure from the banking sector. There are no guarantees it will not be pushed back further.