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Wake Up The Banking Police

That’s the goal, after all, of the almost 1,000-page document approved by banking, securities and commodities regulators last week. Years in the making, the rule is supposed to reduce the risks that a major bank will have to be rescued by taxpayers if some of its bets go bad.

The Volcker Rule has landed. Will the United States financial system be safer and sounder as a result?

That’s the goal, after all, of the almost 1,000-page document approved by banking, securities and commodities regulators last week. Years in the making, the rule is supposed to reduce the risks that a major bank will have to be rescued by taxpayers if some of its bets go bad.

The rule, named for Paul A. Volcker, the former Federal Reserve Board chairman, was supposed to be the 21st century’s answer to the Glass-Steagall Act, the Depression-era law that separated investment banks from their commercial brethren. To at least one financial historian, the emergence of the new rule last week was momentous.

“The passage of the Volcker Rule represents a step partway back to the Glass-Steagall regime that has historical significance for helping to give us four to five decades of relative financial stability from the 1930s to the 1980s,” said Richard E. Sylla, the Henry Kaufman professor of the history of financial institutions and markets at New York University. “Even if we don’t see a lot of actions against violators, the mere fact that the rule is on the books will make banks think twice before engaging in activities that might result in actionable violations.”

As a result, Professor Sylla said, “the financial system should become more responsible and safer.”

Let’s hope so.

Still, Mr. Sylla’s point about actions against violators raises perhaps the most crucial question surrounding this new rule. How assiduously will the regulators charged with enforcing it do their jobs?

We learned all too well during the lead-up to the recent financial crisis what happens when bank watchdogs snooze. There were plenty of regulations on the books that could have been enforced to rein in reckless lenders. But the police force was disengaged, or worse, protecting the institutions it was supposed to oversee.

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