Banking Practice Exam

The Dodd-Frank Volcker Rule was part of the financial reform legislation enacted in response to the financial crisis of 2007-2008, aiming to prevent excessive risk-taking in the banking sector. The correct choice reflects that the Volcker Rule specifically prohibits proprietary trading by banks using funds insured by the Federal Deposit Insurance Corporation (FDIC).

Proprietary trading refers to financial institutions trading financial instruments for their own profit rather than on behalf of customers. This prohibition is designed to protect depositor funds and ensure that banks prioritize the interests of their clients over potentially risky speculative trading activities that could endanger the safety of the financial system.

By restricting banks from engaging in such trading, the rule aims to reduce the likelihood of conflicts of interest and discourage banks from taking on excessive risks that could lead to another financial crisis. The focus is on maintaining the stability of the banking system while ensuring that the deposits of consumers and businesses are safeguarded.

The other options presented involve concepts not aligned with the primary objectives of the Volcker Rule. For instance, while the merging of commercial and investment banks has been a topic of debate, the Volcker Rule does not facilitate such mergers, nor does it encourage investing in hedge funds, which is more about promoting greater