So what happened to the much-lauded Volcker rule, which would limit the size and scope of bank activities, in Sen. Chris Dodd's latest financial reform bill? It's a bit complicated, but essentially the rule is gone. Regular readers will recall that the key distinction between the Volcker rule, as proposed by the Obama administration, and similar provisions in the House bill, was that the Volcker rule was mandatory: It required regulators to ban proprietary trading, hedge and private-equity funds from commercial banks, and would offer specific limits on the size of a bank's liabilities. The House bill, on the other hand, would simply give regulators the authority to limit a firm's size and scope however they pleased if they determined it was necessary. While the House authorities were more powerful, they are also less likely to be implemented; the Volcker rule provides definitive, hard and fast lines.Well, no more. The new method is that the Systemic Risk Council will have six months to study how and why to implement the size and scope rules, and then recommend how to write those rules, or even if they should be written at all. Basically, it's regulatory discretion with a time limit: The council has six months to do the research and nine months after that to write rules that could be either totally cosmetic or, less likely in my view, actually effective.This is ostensibly because drawing careful lines around proprietary trading and determining the correct size of a financial institution are too complicated to legislate. I'm somewhat sympathetic to that argument, but I see no reason why Congress couldn't at least draw outer boundaries to guide regulators rather than putting nearly the whole package in its hands. With the right appointees, this could still be a useful rule, but it's supporters shouldn't pretend it is much different from what the House already passed into law. That doesn't mean that the rule can't be changed further down the line, but I think Dodd is sending a pretty clear signal on this one.(For junkies, we're talking Sec. 619. [PDF])-- Tim Fernholz
