Federal Reserve Rolls Back Rules That Bar High-Risk Trading By Banks

America's six largest banks all lobbied for changes to the Volcker Rule.

American banks have finally found success in peeling back regulations imposed after the 2008 financial crisis – wrought by the risky and at times dishonest behavior of those same banks – and now federal regulators are proposing another huge win for Wall Street: loosening the Volcker Rule.

The change would give Wall Street banks more freedom to make their own complex bets — activities that can be highly profitable but also leave them more vulnerable to losses.

The rule, part of the broader Dodd-Frank law, was put in place to prevent banks from making unsafe bets with depositors’ money. It took five agencies three years to write it and has been criticized by Wall Street as too onerous and harmful to the proper functioning of financial markets. On Wednesday, the Federal Reserve proposed easing several parts of the rule, and four other regulators are expected to soon follow suit, kicking off a public comment period that is expected to last 60 days.

What are the proposed changes?

  • Banks will no longer have to prove each trade serves a purpose beyond a speculative bet “by showing regulators specifically how each trade either meets customer demands or acts as a hedge against specific risks”; instead, they would be required to implement strict internal controls to ensure they’re meeting Volcker Rule requirements.
  • The current rule sets strict standards that don’t differentiate between trading desks serving different assets – i.e., corporate bonds and derivatives; the proposed change would give banks more freedom to decide what levels of trading activity are acceptable for meeting customer demands on each trading desk.
  • Banks would be grouped into categories based on how much Wall Street trading they do, meaning those engaging in less trading would have a less stringent set of rules to abide.

In a briefing for journalists on Wednesday, an agency official said letting banks set their own risk and activity limits would help reduce the difficulties big banks face in trying to prove that their various market activities, which can differ greatly from one another, conform to a set of rigid standards.

Regulators will also continue to collect trading information from the largest banks, which are subject to strict oversight and monitoring as part of the enhanced supervisory process put into place after the crisis.

While the move has been celebrated by Wall Street and business groups, consumer advocates are some lawmakers are concerned federal regulators are headed in the wrong direction.

“This proposal is no minor set of technical tweaks to the Volcker Rule, but an attempt to unravel fundamental elements of the response to the 2008 financial crisis, when banks financed their gambling with taxpayer-insured deposits,” Marcus Stanley, policy director at Americans for Financial Reform, said in a statement.

Senator Elizabeth Warren, the Massachusetts Democrat who has been among the most vocal critics of changes to Dodd-Frank, called the proposal the latest example of corruption in Mr. Trump’s Washington.

“Even as banks make record profits, their former banker buddies turned regulators are doing them favors by rolling back a rule that protects taxpayers from another bailout,” Ms. Warren said.

But the Federal Reserve maintains the changes are not meant to undo the protections put in place by the rule – only make improvements.

“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,” the Fed chairman, Jerome H. Powell, said at a board of governors meeting. “Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements.”

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