“Volker Rule”.

Ethics paper

Yoichi Horibe

             I would like to talk about “Volker Rule”. This law prohibits banks from certain transactions. The inventor, Paul Volker was president of the Federal Reserve Bank. He and president Obama want to prevent the kind of crisis we had in 2008 crisis. This rule was made by the two men last November and it is supposed to be enacted officially this summer. Mr. Dimon, who is president of JP Morgan Chase strongly, complains that the Volker Rule is open to loose interpretation and is infantile and not based on facts. Concretely, this rule eliminates proprietary and derivative trading at commercial banks. They will not be able to finance hedge funds.

This creates an ethical problem; a financial paradox between taxpayer, government and financial market.  Financial institutions are protected by taxpayer guarantees. The Volker Rule would increase the bank’s costs and reduce their profit. This rule would be unfair to taxpayers who have to bail out banks when they don’t make profits. On other hand, the financial institution is also affected negatively because it is really important for banks to optimize their profit and do a good banking business.  The government made the rule but this regulation is really ambiguous and complicated. Many commentators say this rule is useless and will have the opposite effect from that which is intended.

Banks need proprietary and derivative trading because they can put their customers’ money into investment to earn profit. They can use the profit for banking business costs like marketing, advertising, and infrastructure etc. This is really a virtuous circle for banker and customer.  It is also important for banks to make a connection with hedge funds because if the bank goes into bankruptcy, the hedge fund could help them as a “White Knight” by giving them money. 

The banking side has to solve these problems. Certainly, this rule could prevent banks from catastrophic crisis but basically the productivity and the efficiency would be reduced.  The solution they find will determine how we survive this era.

In conclusion, financial institution can’t control their sophisticated investment technology and the government can’t make a suitable rule for it. The goal of an investment science is to accurately assess risks and earn profits. The way of proprietary and derivative trading are used varies from one institution to another. Some fund managers are risk takers and do not make ethical or moral decisions. Others do. My father, for example works, in an institution where executive officers are educated about business ethics. It is important that the next generation of business professionals be given such an education.