Playing by the Volcker Rule: How Deregulation Threatens the Firewall Between Banks and Risk

The Volcker Rule’s Covered Fund Provision, enacted under the Dodd-Frank Act in 2013, was designed to separate traditional banking from speculative investment activities to safeguard financial stability and delineate the roles of distinct segments within the financial system. In 2020, financial regulators compromised this regulatory firewall by excluding venture capital and credit funds from the provision’s restrictions, allowing banks to serve as investors, sponsors, and working partners. This paper critiques the 2020 modification through a combination of legal and regulatory analysis. I will first examine the foundational purpose and structure of the original Volcker Rule. Then, I will interpret the statutory definitions, treatment, and risk profiles of venture capital and credit funds. Together, these analyses support the paper’s primary contention that the 2020 modification failed on two core fronts: contradicting the original legislative intent of the Volcker Rule and reintroducing systemic vulnerabilities by enabling banks to invest in high-risk, illiquid, and speculative funds. Reinstating an uncompromising definition of covered funds and creating a clear separation of federally insured banks from speculative investments will be critical to maintaining systemic financial stability and preserving systemic resilience from future crises.