The Washington Post
The nation’s biggest banks are about to get relief from the loathed Volcker Rule
The biggest banks may have missed out on the regulatory relief Congress approved this week for the rest of the industry. But they won’t have to wait long for their share.
The Federal Reserve is meeting next week to consider rolling back the Volcker Rule, a legacy of post-crisis regulation reviled by Wall Street banks. The rule, adopted in 2013, bars commercial banks with federally insured deposits from making certain kinds of risky bets with their own and their depositors’ money. Bankers at those firms hate it because it curbed hefty profits from their trading desks and imposed compliance requirements they call overly burdensome and arbitrary. (JPMorgan chief executive Jamie Dimon once said the rule requires traders to have “a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something.”)
The push to trim it — the Fed’s Board of Governors will vote on proposed changes Wednesday — belongs to a broader effort by the Trump administration to ease constraints on the financial sector. And that campaign looks to be accelerating as the president gets more of his handpicked regulators into position: The Senate on Thursday confirmed Jelena McWilliams, Trump’s nominee to head the Federal Deposit Insurance Corp., one of the five agencies that oversee the Volcker Rule’s implementation. ( There has been more movement this week, with Brian Montgomery, the president’s pick to head the Federal Housing Authority, earning Senate confirmation on Wednesday, six months after he cleared the Senate Banking Committee.)
Volcker 2.0, as regulators are calling the proposed revamp of the rule, would offer major relief to big banks by narrowing its standards for improper trades. For one, it would shift a burden from banks to prove that a trade is permitted to regulators to prove that it isn’t, Reuters’s Pete Schroeder reports. “Regulators are also considering simplifying definitions central to the rule, such as what constitutes proprietary trading, and the treatment of overseas funds.”
Wall Street firms have been leaning on policymakers for major changes if not wholesale repeal since the rule’s inception. And the Trump administration has made it clear it had its sights set on rolling back the rule as part of its deregulatory push, with the Treasury Department outlining a number of the tweaks in a report in June spelling out its priorities.
Morgan Stanley chief executive James Gorman said on the bank’s most recent earnings call that while he personally agreed with the rule’s intent, it “walked into something which is far more complex, requires a lot of attestations and in many people’s view has impinged on lack of liquidity and moved from a focus on proprietary activity to principal trading activity. I think the regulators are obviously very aware of the industry response on this, and this is an opportunity where they are taking a hard look at it.”
And Goldman Sachs chief financial officer Marty Chavez, on that firm’s most recent earnings call, complained that the “number of data points that one has to generate is quite complicated.” He noted that Fed officials agree that “it’s more complicated than it needs to be.” That’s accurate: Fed Vice Chairman Randal Quarles — another Trump nominee, who’s charged with charting the central bank’s course on regulations — in March said it was too complex and “not working well.”
Bloomberg Opinion’s Stephen Gandel disagrees, writing earlier this month that despite a number of loopholes in the existing rule, it “actually appears to be working.” The rule, he wrote, “has significantly limited the type of activity it was meant to curtail. Banks have been ramping up their trading risk a bit lately, but it is still way down from what it was before Dodd-Frank. Most banks largely eliminated their proptrading divisions a few years ago, and there’s no indication they are coming back, even under the Trump administration’s lighter touch. That could be in part because investors want banks to be less risky, but it’s hard not to give Volcker some credit as well.” That said, Gandel argues that tweaking the measure could actually improve it: “Forcing regulators to use their own judgment as to what is a prop trade may make the right regulators more active in policing it.”
Meanwhile, bigger banks, including JPMorgan and Citigroup, are also lobbying for a legislative victory of their own, “pushing Congress to redefine swap transactions made between different affiliates of the same company so that they aren’t subject to certain rules” stemming from Dodd-Frank, The Wall Street Journal’s Gabriel Rubin reports. “The move would prevent regulators from forcing banks to post collateral for those transactions, potentially saving banks hundreds of millions of dollars in compliance costs.” House Republicans are looking to attach the measure to funding for the Commodity Futures Trading Commission.