The Great Recession’s roots started growing in 2007, when Americans began defaulting on their mortgages en masse. In the handful of years leading up to 2007, financial institutions in the United States began extending mortgage offers to applicants who didn’t at all deserve to be approved for such loans, who are also known as subprime borrowers.
At the time, mortgage-backed securities were popular, which are financial instruments that are backed by mortgages. These mortgages were largely subprime. As people began failing to pay off their mortgages on time, these securities flopped, leaving investors to scramble for help.
This turmoil caused the major financial services provider Lehman Brothers to collapse. Other big banks across the United States followed suit, which were then bailed out by the U.S. government.
In response to the Great Recession, the United States Congress passed a massive overhaul on the financial services industry in 2010 called the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is most commonly referred to as Dodd-Frank. One part of Dodd-Frank, section 619, known as the Volcker Rule, prevented banks in the United States from pouring funds into speculative investments – investors who buy into speculation simply hope that they’ll become more valuable in the future. The Volcker Rule also banned proprietary trading, which is when banks use their own money to trade financial instruments with the goal of turning a profit for themselves rather than using their investors’ money.
Earlier today, on Tuesday, Aug. 20, 2019, the FDIC, or the Federal Deposit Insurance Corporation, which insures deposits that consumers make in bank accounts, voted in favor of an overhaul of the Volcker Rule.
The reason why the FDIC voted in favor of revising and opening up section 619 of Dodd-Frank was because countless banks and their employees have complained about such rules, stating that they’re far too messy to reasonably deal with.
Just to provide reference for how sticky the Volcker Rule truly is, within three years of the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators created and issued a whopping 21 individual sets of frequently asked questions regarding the Volcker Rule.
Now that the FDIC is on board with the change, as well as the Office of the Comptroller of the Currency, which approved the move earlier today, the opinions of the Securities and Exchange Commission and the Federal Reserve will still need to be heard before the existing legislation is changed.