Case Detail

Case Summary

The Volcker Rule: Financial Crisis, Bailouts, and the Need for Financial Regulation

Case Number: 5-412-753, Year Published: 2013

HBS Number: KEL703

Request PreviewBuy

Authors: Dylan Minor

Key Concepts

Economics, Ethics, Government Policy, Politics, Public Policy, Regulation, Society and Business Relations, Nonmarket Strategy, Dodd-Frank, Financial Crisis

Abstract

In response to the potential collapse of large financial institutions in 2007, the U.S. government committed trillions of dollars to loans, asset purchases, guarantees, direct spending to provide fiscal stimulus, expansionary monetary policy, and bailouts of various private financial institutions. The bailouts were especially controversial because public money was used to protect private financial institutions and their wealthy executives while ordinary citizens received no such protection.

One outcome of the government’s response was the proposal to enact into law the Volcker rule, which prohibited banks from engaging in proprietary trading, or trading for their own—not their clients’—benefit. Proprietary trading was believed to generate up to 10 percent of total trading revenues, which would have exceeded $5.9 billion in 2010 for the six largest American banks alone.

If the Volcker rule were to become law, government agencies, including the Federal Reserve, the Securities and Exchange Commission, the FDIC, and the Office of the Comptroller of the Currency, would write the detailed regulations that would implement the law. These agencies employed civil servants but were run by political appointees with technical backgrounds. After issuing a notice of proposed rulemaking the agencies would solicit comments from the public, which would help shape the regulations.

Executives of large banks needed to decide how to respond to this potential change in their business environment.

Learning Objectives

After analyzing the case, students should be able to:
• Understand and map out the various interests at work in shaping a regulation
• Develop a nonmarket strategy for a company facing a potential regulatory change
• Predict the likely outcome of a proposed regulation

Number of Pages: 5

Extended Case Information

Teaching Areas: Economics

Teaching Note Available: Yes

Geographic: United States

Industry: Banking

Year of Case: 2012