The implementation of the Volcker Rule, which basically ensures, or rather tries to ensure, that the taxpayer’s money is not used for speculative trading, is important for two reasons. The first is from the point of view of prudence, where the sanctity of the ethos behind intermediation needs to be preserved. The purpose of intermediation is to channel funds from savers to borrowers, and banks have superior knowledge and analytical tools to bridge information asymmetry to evaluate borrowers. As a corollary, using this money for taking calls in the market is not desirable. The way it has been so far is that when profits are made, the traders and executives reward themselves with bonuses while losses are socialised with the deposit-holders bearing the brunt.
The second is more ideological in nature—why should we stop at just trading and not look at core lending—because the genesis of Volcker was the financial crisis where the concept of sub-prime lending sparked the rot. Therefore, it was lending which started the weakening of the walls.
The present Volcker rule is obviously a good move as it tries to put a halt to proprietary trading by banks which means that they cannot invest in private equity funds, stocks, hedge funds and commodity pools, etc. However, there are exceptions which are allowed that tend to dilute the rule as they are open to interpretation. First, one can trade in government bonds. The assumption is that we can never have a crisis here. But in the American context, the fears of a US default are not unreal any more. This can create chaos in terms of revaluation of bonds by banks. This is definitely a risk carried given the turbulence witnessed in the markets on account of the recent shutdown, debt ceiling crisis and tapering activities in the US.
Second, banks can continue with such trade outside the American geography, which means that a GS or JPM can continue doing so through its subsidiary in the European continent. Third, banks can take positions for clients in markets but have to hedge the same by taking an opposite position.