Fed takes first step to scale back Volcker Rule limits on bank trading
WASHINGTON – The Federal Reserve Board on Wednesday took the first step toward loosening the Volcker Rule restrictions on investment trades by large banks as Republicans press forward with a deregulatory agenda sought by Wall Street.
The Volcker Rule, mandated by the 2010 Doddfrank reforms spurred by the financial crisis, prohibits banks with federally insured deposits from trading for their own profit rather than on behalf of customers. It also limits ownership of risky investments, such as relationships with hedge funds and private equity funds.
Such so-called proprietary trading by large Wall Street firms was a factor in the 2008 crisis as banks made risky bets on the market through stocks, derivatives and other complex financial instruments. When many of those investments backfired, taxpayers ended up picking up the tab through hundreds of billions of dollars in bailouts.
In revisions developed jointly with other regulatory agencies, the Fed’s staff proposed to focus compliance on the banks that do the most trading. Proprietary trading will still be prohibited, Fed officials stressed, but the revisions are designed to give banks more clarity and leeway about what constitutes such trading and what is allowed when they seek to trade for hedging and other purposes.
Banks with smaller trading operations would get reduced requirements, with many getting the presumption that they are in compliance with the Volcker Rule.
Still, the changes fall well short of the hope of many Republicans and industry executives to repeal or gut the rule.
“Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements,” Fed Chairman Jerome H. Powell said at the central bank’s board meeting Wednesday.
He said the proposed changes were “faithful to both the text and spirit of the law.”
The Fed’s Board of Governors voted 3-0 Wednesday to formally launch a rule-making process based on the proposal. The public will have a chance to comment.
Despite the bailouts, financial industry lobbyists have pushed back strongly against the Volcker Rule restrictions, which were enacted in 2013 after regulators from five agencies spent three years crafting them. They took effect in 2015.
Banks have complained that complying with the Volcker Rule has been overly burdensome. But that hasn’t stopped profits from soaring in recent years. The Federal Deposit Insurance Corp. reported last week that U.S. banks had a record $56 billion in profits in the first quarter of the year.
With a slew of new financial regulators appointed by President Donald Trump, the Fed and other agencies that oversee the Volcker Rule have jointly developed a proposal to ease the rules.
“It will be among the most significant set of regulatory concessions Wall Street banks will get for the foreseeable future,” Ian Katz, an analyst at strategic research firm Capital Alpha Partners, wrote in a report this week.