Volcker Rule
The Volcker Rule, Section 619 of the Dodd-Frank Act, bars US banks that take insured deposits from proprietary trading — betting their own money in markets — and limits their ownership of hedge funds and private equity funds.
After the 2008 crisis, regulators asked why banks backed by deposit insurance were making risky trading bets. Former Fed chair Paul Volcker proposed a simple answer: they shouldn't. The resulting Volcker Rule separates core banking from speculative trading. This entry explains what it bans, what it allows and how it affects markets.
- Category
- Market Structure
- Reading time
- 3 min
- Also called
- Section 619 of Dodd-Frank, Proprietary trading ban
- Updated
The Volcker Rule in plain words
The Volcker Rule is Section 619 of the Dodd-Frank Act; it prohibits banks from proprietary trading and from using depositors' funds for risky investments.1
It also bars banks from owning or investing in hedge funds or private equity funds.1
The Federal Reserve is among the agencies that issued and updated the rules implementing it.2
How the rule works, step by step
Identify banking entities
Banks with insured deposits and affiliates.
Ban proprietary trading
No short-term bets for the bank's own account.
Allow exemptions
Market making, hedging, underwriting. See Market Maker.
Limit fund stakes
Restrictions on hedge and PE funds. See Hedge Fund.
Require compliance
Programs, metrics, reporting.
Supervise
Regulators examine compliance.
Worked examples
Example 1 — Banned trade
Not allowedA bank's desk buys $500m of stocks purely to profit from a short-term rally.
| Purpose | Own-account speculation |
| Status | Proprietary trading — prohibited |
The rule prohibits banks from proprietary trading.1
Example 2 — Permitted market making
AllowedThe same bank buys bonds from a client to resell to other clients.
| Purpose | Serving client demand |
Market making for customers is generally permitted under the rule's exemptions. See Market Maker.
Example 3 — Fund stake
RestrictedA bank wants to buy a large stake in an outside hedge fund.
| Status | Restricted |
The rule limits banks owning or investing in hedge funds and private equity funds.1
What the Volcker Rule allows vs bans
| Aspect | Allowed | Banned or limited |
|---|---|---|
| Trading | Market making, hedging | Proprietary trading |
| Funds | Limited stakes | Large hedge/PE fund ownership |
| Underwriting | Allowed | — |
| Government bonds | Exempt | — |
Why the Volcker Rule matters
Bank risk
Separating deposits from speculation. See Systematic and Systemic Risk.
Market liquidity
Debate over less dealer capacity. See Liquidity.
Hedge fund growth
Traders moved from banks to funds. See Hedge Fund.
Bank investing
Understanding bank business models.
Advantages and disadvantages
Advantages
- Reduces taxpayer exposure to bank speculation.
- Clarifies bank roles.
- Limits conflicts of interest.
Disadvantages
- Hard to tell market making from prop trading.
- May reduce market liquidity.
- Complex compliance.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why deposits matter
Beginner
Because insured deposits are backed by the government, using them for speculative bets puts taxpayers at risk.1
Ongoing rulemaking
Intermediate
Regulators have revised the implementing rules over time, and the Fed publishes related statements and announcements.2
Market-making grey zone
Advanced
Distinguishing inventory held for clients from speculative positions is difficult, so the rule relies on metrics and compliance programs. See Shadow Banking.
Common mistakes
Thinking banks can't trade at all
Market making and hedging are allowed.
Confusing it with Glass-Steagall
Different, narrower rule.
Assuming it applies abroad
It targets US banking entities.
Ignoring revisions
Rules have been eased and updated.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- The Volcker Rule is Section 619 of Dodd-Frank.
- It bans proprietary trading by banks.
- It limits bank stakes in hedge and PE funds.
- Market making and hedging are exempt.
- Rules have been revised over time.
Frequently asked questions
Who was Paul Volcker?
Does the rule still apply?
Does it apply to hedge funds?
Further learning
- Market Maker
The permitted activity.
- Hedge Fund
Where prop traders went.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Volcker Rule (opens in a new tab) Checked .
- Federal Reserve Board. Volcker Rule (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.