The administration's proposed "Volcker Rule," which would bar banking organizations from proprietary trading and private fund sponsorship/management activities, is conceptually deficient, will have anticompetitive effects and will not benefit the financial service industry, its customers or the financial economy.

First, the rule would apply to banking organizations that take deposits, the theory being that they enjoy the benefits of the federal safety net and should not be allowed to exploit the cost-of-funding and government backstop benefits that come with that position. In the last crisis, however, the government rescued a number of key non-banking firms and extended the federal safety net to nondepository financial institutions. Thus, barring banks from trading and funds management activities will do nothing to address systemic risks unless the government is prepared to say definitively that any financial institution outside the "no proprietary trading" wall will be allowed to fail.

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