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The Volcker Rule and Market-Making in Times of Stress
Report

The Volcker Rule and Market-Making in Times of Stress


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Editorial Rating

7

Qualities

  • Comprehensive
  • Analytical
  • Well Structured

Recommendation

Economists Jack Bao, Maureen O’Hara and Alex Zhou look into whether regulators have gone overboard in their curtailing of the financial sector’s activities following the 2008 financial crisis. They examine the Volcker Rule, one of the crisis-inspired regulations, and its impacts so far on liquidity in the corporate bond market. Their findings describe a butterfly effect in the financial ecosystem: The commendable aim of protecting taxpayers from banks’ speculation can have harmful unintended consequences. getAbstract suggests this scholarly, illuminating analysis to regulators, financial executives, broker dealers and risk managers.

Take-Aways

  • The Volcker Rule limits certain financial institutions’ ability to engage in speculative activities, which raises concerns about its effects on market liquidity.
  • Research indicates that stressed corporate bonds saw a greater decrease in liquidity after the rule’s implementation than before.
  • The effect on liquidity in stressed conditions, post-Volcker Rule, is on a par with the pressures experienced during the 2008 financial crisis.

About the Authors

Jack Bao and Alex Zhou are economists at the Federal Reserve Board. Maureen O’Hara is a finance professor at Cornell University.