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Source: Riyad Bank

Volcker Rule and the "Too Big To Fail"

Volcker rule refers to the US. President Obama's proposal for reforming the US. banking sector announced Thursday January 21st. The reform simply prohibits banks from owning, investing or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers. However, banks can continue proprietary trading related to their customers’ businesses. In addition to limiting the operation of banks, Volcker rule also attempts to limit the size and concentration of banks. The President also suggested preventing any further consolidation of the financial system.

Obviously, the new proposed rules reverse a long history of deregulation and consolidation that shaped the current structure of the US financial system with thousands of micro or smaller banks and financial institutions at the bottom and giant overseas financial groups at the top. Currently, the US financial system includes more than 8,000 banks. According to official figures, the top four banks captured more than 35 percent of total deposits in 2009, and that is just from less than 6 percent a decade ago. Market share became even more concentrated in trading and investment banking, where a few number of Wall Street activists, along with few overseas competitors entirely running the system. As a matter of fact, the procedures taken by the US government during the crisis have promoted this concentration when poorly performed institutions are forced to merge with stronger ones. In 2008, based on official recommendations JPMorgan Chase took over Bear Stearns and Washington Mutual, Bank of America acquired Merrill Lynch and Wells Fargo bought Wachovia.

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