Christian R. Proaño

[…] As widely known, the main feature of the Volcker Rule is the prohibition to commercial banks to engage in proprietary trading, whereby the customers’ deposits are used for trading activities by banks on their own behalf. In this sense, the Volcker Rule has been considered by many as just a partial reestablishment of the Glass-Steagall Act of 1933, which prohibited any institution from acting as any combination of an investment bank, a commercial bank and an insurance company.

While it is true that the recent financial crisis was not caused by proprietary trading by commercial banks, tackling this open flank in financial regulation is vital for the establishment of a sound and sustainable financial system. Indeed, as we discussed in a recent paper (Chiarella, Flaschel, Hartmann and Proaño 2012) in a stylized theoretical macroeconomic framework, an increasing orientation of commercial banks towards trading activities in detriment to their classical lending activity for real investment purposes may lead to financial and macroeconomic instability. […]

This a short excerpt of my most recent Economonitor blog post “The Volcker Rule is a Necessary, but not a Sufficient Condition for Macrofinancial Stability” with Florian Hartmann, Carl Chiarella and Peter Flaschel. You can find the blog post on the Economonitor website

http://www.economonitor.com/blog/2013/12/the-volcker-rule-is-a-necessary-but-not-a-sufficient-condition-for-macrofinancial-stability/

Check it out!