Volcker's proposal on the reform of American financial supervision system, if passed by the US Senate, will become American law, which will profoundly affect the stability, structure and future development path of American financial system. Volcker's first proposition is to restrict the proprietary trading of financial institutions, which actually means that commercial banks and bank holding companies must separate investment banking from other businesses, which is equivalent to the financial system must operate separately. Volcker believes that the number of deposit-taking institutions such as commercial banks and bank holding companies has been greatly reduced. Although they are still playing their traditional financial intermediary functions, and continue to provide basic revenue and expenditure services and serve the local market, the functions of such financial institutions are constantly expanding in the so-called financial innovation, and their businesses are becoming more extensive and diverse, and their traditional functions are gradually weakening. The emerging investment banking business, structured financial instruments, wealth management and huge "hedging" transactions are increasingly strengthened, which eventually leads to the disadvantages of excessive leverage and excessive risk positions in the entire financial system. More importantly, the boundary between the traditional business of commercial banks and the innovative business of investment banks has been crossed, and some proprietary transactions have even eroded the deposits of savings customers.

Volcker pointed out that during the financial crisis, Citibank and Bank of America invested a total of $250 billion in mortgage-backed securities in off-balance-sheet business, part of which was used to preserve customers' deposits, but the final loss had to be paid by the government and taxpayers. In order to completely change this situation and establish an effective firewall, it is necessary to separate the business of financial institutions from each other and prevent financial institutions from using deposits to "subsidize" their speculative transactions.

However, Volcker's proposal to restrict proprietary trading of financial institutions has caused great controversy on Wall Street. Wall Street believes that restricting proprietary trading of financial institutions may endanger the basic functions of the market. The proprietary trading of financial institutions is generally divided into two types, one is market maker trading, and the other is profit trading, also known as directional trading. Market-maker transaction means that financial institutions, as buyers and sellers in the financial market at the same time, quote the buying price and selling price of financial products with a certain spread, and obtain the spread income through two-way transaction. In this process, financial institutions are maintaining the financing function of the financial market, thus ensuring the liquidity of the financial system, and the volatility of the market is controlled within the spread. Directional trading, for financial institutions, is a kind of transaction with very clear purpose. Financial institutions will choose one direction to go long or short to gain capital gains. This mode of operation of financial institutions may lead to a trend of ups and downs in the market.

It is difficult for regulators to distinguish between these two market functions. If proprietary trading is completely restricted, it will affect market-making trading. Wall Street believes that if the proprietary trading of financial institutions is restricted, the financial market will lack market makers and the liquidity of the market will be substantially affected. Wall Street satirizes Volcker as a pedantic "antique", because this reform proposal is equivalent to stiffly pulling the United States back to the mode of separate operation and separate supervision established by glass-steagall act, which was cancelled in 1999. Volcker's second proposition is that there are hedge funds and private equity funds in financial institutions that oppose deposit taking. Volcker believes that more than 40,000 hedge funds operate trillions of dollars and invest hundreds of trillions of financial assets. These institutions and businesses that are not covered by financial supervision and safety net actually undermine the financial stability mechanism. The increasingly diverse and complex financial instruments and speculative operations make the financial market evolve in the cycle of passion and speculation, crisis and fear, which has caused a substantial impact on the stability of the financial system and the economic system.

Volcker's second proposition is equivalent to separating the most profitable business on Wall Street from financial institutions, which is actually another embodiment of the concept of separate operation. Of course, the U.S. government has realized that excessive derivatives trading by hedge funds and private equity funds is harmful to financial stability. Obama urged the Senate to make restricting derivatives trading the focus of the reform of the financial supervision system and incorporate it into the proposal. Buffett even thinks that financial derivatives are "financial weapons of mass destruction". However, because the lobbying power of Wall Street is very strong, and this business is the most profitable business on Wall Street, Congress is in a tangled state. In the procedural vote that day, even some Democratic senators voted against it. Volcker's third important proposition is to limit the size of financial institutions. Volcker believes that the number of financial institutions is decreasing, especially the trend of large commercial banks is extremely obvious. At present, there are 25-30 commercial banks in the world, which are rich in assets and diversified in business, but their traditional functions are gradually decreasing and their risk behaviors are constantly escalating. This trend has also appeared in other industries such as insurance. In this way, large financial institutions have systemic importance, and their potential systemic risks may cause huge moral hazard, which is the so-called "too big to fail" effect. More seriously, the large financial institutions in the United States are not only "too big to fail", but also too big to be sustainable, difficult to manage and difficult to compete, which is unfavorable to the development and stability of the entire financial system. To this end, in addition to divesting other businesses, we should also limit the scale of financial institutions and even split financial institutions when necessary.

Volcker's statement has been questioned more. Wall Street thinks Volcker is naive and pedantic. Krugman also criticized Volcker's idea of breaking up large financial institutions in his The New York Times column. Krugman pointed out that splitting large financial institutions may not achieve the expected effect in alleviating the impact of the financial crisis, and the financial crisis may have a huge impact on the economy through the large-scale bankruptcy of small banks. In fact, the Great Depression is a vivid example. Most of the banks that went bankrupt at that time were small and medium-sized banks, so that the Fed thought that their bankruptcy would not have a substantial impact. However, the reality proves that the Fed is wrong. The large-scale bankruptcy wave of small and medium-sized banks completely destroyed the basic functions of the financial system and subverted the track of economic growth.

Volcker pointed out that limiting the size of large financial institutions can avoid the systematic impact of financial institutions, prevent the occurrence of similar crises, and avoid the huge cost paid by financial regulators in the rescue. But Krugman believes that Volcker's goal may not be achieved, and the most important thing after the crisis is liquidity and market confidence; The fragility of American financial system lies in the expansion of shadow banking system and the backwardness of financial supervision system, not in the scale of financial institutions. By the end of 2007, the scale of the growing shadow banking system has surpassed that of traditional commercial banks, and the asset scale has exceeded 10.5 trillion US dollars. These institutions have replaced traditional commercial banks and provided many financial functions, but they lack supervision, not to mention the safety net of the supervision system, thus greatly improving the fragility of the financial system.

Judging from the failure of the procedural vote in the Senate on April 26th, there are still big differences in the reform plan of the financial supervision system of the Obama administration, especially the completely different attitudes of Obama and Wall Street towards the Volcker Rule will be reflected in Congress. Like the "incredible" behavior during his tenure as chairman of the Federal Reserve, Volcker's proposition on the reform of the financial supervision system has been greatly questioned. His three main propositions are really "old-fashioned" and even somewhat naive. However, from the perspective of eliminating the institutional deviation of financial mixed operation and separate supervision in the United States, Volcker may be right, but he just violates the fundamental interests of Wall Street. Allen Blind, the former vice chairman of the Federal Reserve, pointed out in his solidarity that Volcker's goal is to limit the risk-taking behavior, especially the individual risk-taking behavior of financial institutions (which may cause huge losses), so as to prevent taxpayers from finally paying the bill. "In this respect, he is 100% correct."