Question

How does the 2008 Global financial crisis impact on 2020 crisis (Hint: Volcker Rule)?

Answer 1

The Volcker Rule prohibits banks from investing in their own accounts and in hedge funds and private equity funds. The objective of Volcker Rule was to prevent banks from making speculative investments which contributed to the 2008 financial crisis and thereby to protect bank customers.

In August of 2019, there was an attempt to amend the Volcker Rule and clarification was sought on what securities trading were not allowed by banks. On June 25, 2020, the restrictions from the Volcker Rule were loosened. Then there were more streamlined set of requirements for the banks. This allowed banks to make large investments in private equity funds. The banks were not required to keep cash for derivatives trades. The loosening led to free up of billions of dollars in capital for the industry. This caused financial crisis in the year 2020.