The Obama administration is reportedly making a new push to get congressional leaders to adopt a set of banking reform measures which have come to collectively be known as the 'Volcker Rule.' The reforms, named after former Fed Chair and current Council of Economic Advisors Chair Paul Volcker, were first floated by the Obama administration in January to the surprise of markets. They are aimed at reducing the ability of banks to engage in particularly risky strategies in an attempt to reduce the risk of the overall financial system. The rules, which also limit the market share of financial institutions, will feel familiar to financial history buffs with an understanding of the goals of Glass-Steagall in the early '30s. This is because the new proposals have a similar goal of forcing banks to keep to core banking activities. In the modern context, this means that banks would need to leave the riskier (and often lucrative) trading activities they now participate in to traders and hedge funds.
How one feels about the rules will be almost perfectly correlated to what one feels the role of banks should be. On the one hand, the banking industry is of the mind that it should be given carte blanche to engage in profit-making activities, which now include proprietary trading and hedging. Though many banks, in particular Goldman Sachs, made incredible profits engaging in these activities in the past, it should have been clear to all involved that changes would be imminent as soon as banks went to the government for assistance during the financial crisis. This will be good news to those in government, and a large portion of the public, who feel that banks need to be reigned in. However, the banking lobby is strong, and Democrats, who provide much of the support for reform, may not be keen to further provoke some of their largest contributors in a year when many are already facing tough fights in their home constituencies. In the end, it is likely that some of the freedoms banks have enjoyed since Glass-Steagall was repealed in 1999 will be curtailed, but it is difficult to believe that all of the current proposals will escape the chopping block in committee negotiations. Therefore, the likely result will be something short of the complete overhaul being advocated by the administration with enough changes to appease the angry masses.