About that "toothless" Dodd-Frank reform...

Dodd-Frank is widely written off as meek, weak and watered down by relentless bank lobbying.  Perhaps it is in many respects. But the long-unfinalized and tortuously complex Volcker Rule, largely eliminating the banks' proprietary trading and in-house hedge and private equity funds, has already had significant effect, as the WSJ's Scott Patterson recounts:

Regulators aren't expected to start strictly enforcing the Volcker rule until 2015, giving banks some breathing room. Because the rule was widely anticipated, most banks already have done away with operations focused on proprietary trading, or making bets with their own money.

For example, Goldman shut down in 2010 its Principal Strategies in-house trading unit, partly as a response to the looming Volcker rule. Last month, Goldman Chairman and Chief Executive Lloyd C. Blankfein outlined other steps being taken by the New York company to comply with the Volcker rule, including "winding down our hedge-fund investments."

Moreover, the relative hawks in the contentious five-agency rule-writing process, most notably outgoing CFTC Chair Gary Gensler, seem to have in large part prevailed on key issues in the rule's pending finalization next week:

Barring a last-minute surprise, the votes will result in tighter restrictions on certain trading activities that go beyond what regulators had agreed to just a few weeks ago, according to people familiar with the matter. Since then, regulators have been locked in tense negotiations that threatened to upend the provision.

Under the final rule, regulators are expected to closely track trading activities with an eye on whether certain trades known as hedges are designed to post a profit rather than offset risks that accompany trading with clients. The finished version of the Volcker rule is likely to require that hedges be designed to reduce specific risks, according to a portion of the proposed rule reviewed by The Wall Street Journal.

We can probably thank J.P. Morgan's London Whale, architect of a multi-billion dollar trading loss on an alleged "hedge," for the tightening.

Dodd-Frank did not stop the nation's largest banks from further increasing their market share. But it has curbed some of their riskiest activities. It will probably be years before we know how much risk it took out of the banking system.