Fed: Ease rule that restricts risky bank trading
WASHINGTON — The Federal Reserve is proposing to ease a rule aimed at defusing the kind of risk-taking on Wall Street that helped trigger the 2008 financial meltdown.
The Fed under new leadership on Wednesday unveiled proposed changes to the Volcker Rule, which bars banks’ risky trading bets for their own profit with depositors’ money. The high-risk activity is known as proprietary trading.
The proposed changes would match the strictest applications of the rule to banks that do the most trading — 18 banks with at least $10 billion in trading assets and liabilities. They account for 95 percent of all U.S. bank trading and include some foreign banks with U.S. operations, Fed officials said.
Less stringent requirements would apply to banks that do less trading. The idea is to make it easier for banks to comply with the Volcker Rule without sacrificing the banks’ safety and soundness, the officials said.
“The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance,” Fed Chair Jerome Powell said at a meeting of the Fed governors. “Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements.”
The move comes amid other government efforts to loosen financial regulations, as President Donald Trump has promised. Fed officials said they received helpful input from other U.S. financial regulatory agencies. The agencies, including the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, will discuss and possibly approve the proposal in their own meetings in coming weeks.
The proposal will be opened to public comment for 60 days.
It also would assume generally that a bank is in compliance with the rule if it records $25 million or less in daily profits or losses from each trading desk over 90 days.
The Volcker Rule, crafted by regulators 4½ years ago, is a key plank of the landmark Dodd-Frank law intended to reduce the likelihood of another financial crisis and taxpayer-funded bank bailout. Trump has blamed Dodd-Frank for constraining economic growth.
The rule is named for Paul Volcker, a Fed chairman in the 1980s who was an adviser to President Barack Obama during the financial crisis. Volcker urged a ban on deposit-funded, high-risk trading by big banks, believing that it would be an effective in averting future economic crises.
Under the Volcker Rule, banks have been required to trade mainly on behalf of their clients. They have pushed against the rule.
“Weakening the Volcker Rule means allowing banks to play with other people’s money again. That was the casino economy before the crisis,” says Ed Mierzwinski, a senior director at the U.S. Public Interest Research Group, a consumer advocacy organization
The Fed is an independent regulator that asserts its separation from political pressure and the White House. Trump, of course, has had the opportunity to put his stamp on the central bank by filling positions on the seven-member Fed board.
Powell, the new Fed chairman since February, was a board member under ex-Fed chairwoman Janet Yellen. He was an investment banker before he joined the central bank.