Fed proposes easing rule that limits risky bank trading
The US Federal Reserve building in Washington.
THE UNITED States Federal Reserve is proposing to ease a rule aimed at defusing the kind of risktaking 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 US$10 billion in trading assets and liabilities. They account for 95 per cent of all US bank trading and include some foreign banks with US 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 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 US$25 million or less in daily profits or losses from each trading desk over 90 days.
Volcker Rule there to protect
The Volcker Rule, crafted by regulators four and a half years ago, is a key plank of the landmark Dodd-Frank law intended to reduce the likelihood of another financial crisis and taxpayerfunded bank bailout.
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 effective in averting future economic crises.
Proprietary trading had become a huge moneymaking machine for Wall Street mega-banks like Goldman Sachs, JPMorgan Chase and Morgan Stanley. It allowed big banks to tap depositors’ money in federally insured bank accounts – essentially borrowing against that money and using it for investments.
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 US Public Interest Research Group, a consumer advocacy organisation
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 Chair Janet Yellen. He was an investment banker before he joined the central bank. After Trump named him Fed chief, Powell told Congress that he believes the rules put into place after the 2008 crisis could be improved, though he doesn’t completely support the administration’s ambition of aggressively rolling back regulations.
Another Trump appointee on the Fed board, investment banker Randal Quarles, is the Fed’s top overseer of Wall Street and the leader in seeking to ease financial regulations. He has said the package of rules under Dodd-Frank should be overhauled but not scrapped. The third sitting Fed governor is Lael Brainard, a former Treasury Department official appointed by Obama in 2014.
Trump has named three others to fill vacancies on the board: two economics professors and the Kansas banking commissioner. They await Senate confirmation.