Risk Targeting and Policy Illusions - Evidence from the Announcement of the Volcker Rule

Abstract

We analyze the Volcker Rule's announcement effects on U.S. bank holding companies. In line with the rule and the banks' public compliance announcements, we find that those banks that are affected by the Volcker Rule already reduced their trading books relative to their total assets 2.34% more than other banks. However, the announcement of the rule did not reduce the banks' overall risk-taking. To keep their risk targets, the affected banks raised the riskiness of their asset returns. We also find some evidence that the affected banks raised their trading risk and decreased the hedging of their banking business.

Keywords: Volcker Rule, proprietary trading, trading book, banking book, hedging, bank regulation

JEL Classification: G21, G24, G28