Prior to the 2010 Dodd-Frank Act "Volker Rule", banks employed proprietary traders (aka Prop Traders) whose job was to invest the Bank's capital in various short-term trading strategies. Prop Traders often took large risks (using leverage) and were rewarded with yearly bonuses worth millions of dollars. Prop Trading was eventually disallowed by the Volker Rule, which was part of Dodd-Frank Act.

Explain the moral hazard associated with such proprietary trading activity.

Answer rating: 100% (QA)

Proprietary trading activity especially when conducted by banks poses significant moral hazards Heres why 1 Conflict of Interest When banks engage in ... View the full answer