There’s a New Volcker Rule Now

In some broad sense, the only thing that a bank could ever do is “proprietary trading.” The bank has some money—from shareholders, from depositors, etc.—and it uses that money to buy stuff. The stuff all comes with some risk,1 so in some sense everything a bank does is making risky bets with its depositors’ money. The old-timey bank that takes deposits and looks borrowers in the eye before giving them mortgages is making a bet, with its depositors’ money, that the borrowers will pay back their mortgages.

But in the aftermath of the 2008 financial crisis there was a lot of political desire to ban proprietary trading, and this desire had a strong you-know-it-when-you-see-it flavor. Obviously making mortgage loans is not proprietary trading; it’s banking.2 Something else is proprietary trading. But what? Clearly taking a bunch of customer deposits and using them to buy risky tranches of mortgage-backed securities in the hope that they’d go up and earn you a big bonus is proprietary trading, yes. But what about buying and selling loans in the secondary market? Parking excess deposits in Treasury bonds? In corporate bonds? Boring regular deposits-and-loans banks have lots of exposure to interest rates and credit; if they use derivatives to hedge those exposures, is that bad proprietary trading or good risk management?