Volcker Rule's arrival greeted by cheers, jeers

President Obama has proclaimed that thanks to the Volcker Rule "never again will the American taxpayer be held hostage by a bank that is `Too Big to Fail', " the reality is a bit more complicated.

Though the rule issued today by financial regulators seeks to ban proprietary trading -- essentially gambling with federally insured deposits --  some experts argue that banks will find ways to get around the restrictions to continue engaging in risky behavior.

"It could take years before regulators figure out the full effects of all the wonderful little loopholes that well-paid bank lobbyists worked into the language," writes Jonathan Weil in Bloomberg View. "Even if the rules were flawlessly written -- and they never are -- there is the matter of whether they will be enforced consistently, which they tend not to be from one administration to the next."

Backers of the Volcker Rule -- named after former Federal Reserve Chairman Paul Volcker, who helped conceive the regulation -- say it strikes a balance between protecting the public from banks taking unwise risks and enabling financial institutions to meet the needs of their customers. As FDIC Chairman Martin J. Gruenberg noted,  a lack of "robust recordkeeping and reporting requirements" made it difficult for regulators to keep track of the activities of large, complex financial institutions. While acknowledging that the rule is far from perfect, proponents say it is an improvement over the status quo. 

"From what I hear, the regulators have done a very good job at closing loopholes and opposed opening loopholes," said Wallace Turbeville, a former investment banker who is now a senior fellow at New York think-tank Demos, adding that proprietary trading by banks makes markets more volatile both in the short- and long-term for the average investor. "It's the kind of thing that we can't say conceptually will never happen again, but we have done a lot to make it more unlikely."

Critics of the Volcker Rule have long claimed that there isn't a definitive link between proprietary trading and the rampant financial speculation that helped trigger the housing crash. They also question how much good the Volcker Rule will do. 

Keith Fisher, a Washington-based partner with law firm Ballard Spahr who represents banks, notes that the rule targets short-term trades by making banks hold onto investments for at least 60 days. It does little to stop institutions from making risky investments or loans over a longer time period.

"The Volcker Rule isn't going to stop the growth of these institutions," he said, adding that banks are more globally connected to one another than ever. If one of these financial institutions were to fail, "It would create a kind of worldwide catastrophe that I fear was only hinted at during the last crisis."

The U.S.  Chamber of Commerce, for its part, argued that the Volcker rule will raise the cost of capital for businesses, placing the U.S. at a competitive disadvantage in the global economy. This sentiment was echoed earlier this year by David John of the conservative Heritage Foundation, who claims in a piece on the think-tank's website that over time the rule will "keep banks from meeting legitimate customer needs, forcing those customers to move their business to other provider." 

If the ultimate impact of the new regulations on the financial system remain unclear, one thing is for sure: The fight over the Volcker Rule isn't over.