A Quantitative Study on the Cost Impact of the Volcker Rule

摘要

The purpose of this cross-sectional quantitative study was to examine the cost impact of the Volcker Rule's mandated separation of proprietary trading from within the commercial banking industry. The study used a multi-product cost function to test for the presence of economies of scope between proprietary trading and commercial banking using archival data for U.S. banks engaged in both activities. The results indicated that banks with joint operation in commercial banking and proprietary trading enjoyed significant economies of scope. However, the efficiency gains were modest, suggesting that forcing banks to divest from proprietary trading would have limited impacts on production cost. Furthermore, there was evidence of increasing return to scale in commercial banking and decreasing returns in proprietary trading, implying that banks may have an incentive to increase their commercial banking business, and a disincentive to increase their trading operations. Several implications arose from these results. Banks that increase the size of their regulated business might derive greater benefits than by pursuing a diversification strategy into proprietary trading. Considering that specialized knowledge may be a key incentive for bank's integration of proprietary trading into their commercial banking operations, management should consider pursuing human resource strategies aimed at transferring that knowledge into their regulated business. Policy makers should consider fostering a regulatory environment that encourages small operators to compete in that market. Policies and regulations aimed to enforce strict monitoring and reporting measures could limit the impact of risk taking on these institutions as well as systemic risk.