After the 2008 financial crisis, Congress, courts, and international banking agencies alike determined that their current banking infrastructures were inadequate to prevent such crises in the future. The Dodd-Frank Wall Street Reform Acttried to solve the problem by reducing derivatives-related risk through legislative provisions that increased capital and liquidity requirements for all banks. Yet, banks continued to find means to subvert the system and Congress remained relatively silent on the issue after the passage of Dodd-Frank—failing to amend Dodd-Frank in any meaningful way. Looking towards European peers for guidance about how to reform the United States’ banking regime has often been discussed but rarely embraced by legislatures. After all, the Volcker Rule’s complexity and ambiguity have long been reviled and our European peers have wholly dismissed its viability for solving their own debt woes. The Vickers Report and Liikanen Report, two such European proposals, provide fertile ground for a series of reforms for United States banking—reforms that increase the chance for resolution and creditor bail-in.
This Note will use these two reports as guideposts for reform—adopting and modifying core provisions of both reports to provide banks with a platform for increased oversight over rogue traders. Although this Note finds that the blanket separation of commercial and investment banking activities intrinsic to the Volcker Rule does not serve banks or consumers well; Threshold separation of banking and trading activities with an embedded bail-in mechanism will assist both banks and regulators from major losses stemming from speculative trades. Establishing a threshold for maximizing capital and liquidity can prevent crises in which proprietary trading activities “gone wrong” once again threaten to collapse the market. Part I will explore the evolution of banking regulations within the United States. Part II will address why the Volcker Rule fails to thwart illicit banking activities. Part III considers the European Union’s proposals and whether their implementation would be compatible with United States’ securities law. Part IV proposes using bail-in debt instruments to assist with the separation of ‘speculative activities’ from deposit-related and customer-oriented activities. Part V suggests a need for internal controls to ensure that agents are accountable within large financial institutions. Last, Part VI considers the public policy benefits of demystifying banking law by reforming the Volcker Rule. European peers have not shied away from such reforms—neither should the United States.