The changes will give big banks, including Goldman Sachs and JPMorgan Chase, a reprieve nearly a decade after risky trading was blamed for contributing to the near collapse of the U.S. financial sector. It will also provide another boost to an industry already reporting record profits — $56 billion during the first three months of this year.
The Trump administration has ushered in a swift change in fortunes for the banking industry. After spending years grumbling about the cost of new regulations and being regularly pummeled by regulators and lawmakers for financial crisis-era misdeeds, the industry has flexed its muscles again and secured some high-profile victories.
Already, Congress has blocked federal rules that would have made it easier for consumers to sue their banks and rescinded a five-year-old Obama-era policy warning auto lenders against allowing minority borrowers to be charged more than their white peers. Last week, President Trump signed legislation rolling back key parts of 2010s financial reform law, known as Dodd-Frank.
But for many big banks, the Federal Reserve’s decision on Wednesday to heed their years of complaints about the “Volcker Rule” is among the potentially most important changes. The rule was established after the global financial crisis to prevent taxpayer-insured banks from making some risky financial bets. But the industry called it too cumbersome and time-consuming and spent years calling for changes.
On Wednesday, the Federal Reserve agreed. “Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements,” said Fed Chairman Jerome H. Powell.
The proposal still must be approved by four other banking regulators, but the Fed’s vote is a major step and other regulators are expected to quickly follow.
The proposed changes are expected to boost the profits of some of the industry’s biggest players and could help build momentum for future banking deregulatory efforts, industry experts said. In the next few months, regulators are expected to address rules outlining how the government enforces a four-decade-old fair lending law that compels banks to lend to borrowers in low- and moderate-income neighborhoods. And a Trump appointee leading the Consumer Financial Protection Bureau has begun a top-to-bottom review of the agency, which has been widely criticized by bankers as well as Republicans.
The Volcker Rule was one of the complex regulations to come out of Dodd-Frank. Regulators spent years crafting hundreds of pages of rules aimed at stopping financial institutions that make loans and offer checking and savings accounts from taking on the same type of risks as hedge funds. Restricting risky trading under the rule, which was named for Paul Volcker, a former chairman of the Federal Reserve, has made the financial system safer, supporters of the rule say.
Volcker said in a statement that though he welcomed efforts to simplify the rule, “What is critical is that simplification not undermine the core principle at stake — that taxpayer banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests.”
Regulators and banking industry officials have both acknowledged the difficultly of trying to distinguish between speculative activities, known as “proprietary trading,” which the rule intends to limit, and other types of activities such as “market-making,” in which banks buy and sell securities to clients, or hedging, in which banks attempt to offset risk in their holdings.
The proposed new rule, dubbed Volcker 2.0, would continue to ban proprietary trading, regulators stressed and would not allow Wall Street to return to its trading heydays. But it would simplify the process for determining which types of trading are permitted and which aren’t. The original rule also generally prohibited banks from holding stakes in a hedge fund. But that would now be allowed in some cases. The revised rule also scales the level of scrutiny facing banks to their size. Banks that do the most trading would receive the most scrutiny.
“Our initial read is that this should offer compliance relief, which should save the banks money,” Jaret Seiberg, financial services analyst at Cowen Washington Research Group, wrote in a note on Wednesday
All three sitting Fed governors, including Lael Brainard, a Democrat, voted in favor of moving the proposal forward. The new rule’s final details could change after a required 60 day comment period that allows the public to weigh in on the changes.
“The premise of the Volcker Rule is compelling. Banks should not engage in speculative trading activity for which the federal safety net was never intended,” Brainard said. The proposal, she said, would is crafted to enact the rule in a more efficient way.
The banking industry said it welcomed the Federal Reserve’s actions. It represents “the growing recognition by policymakers of the unintended negative impact due to the excessive complexity of the current regulations,” Kenneth E. Bentsen, chief executive of the Securities Industry and Financial Markets Association, an industry lobbying group, said in a statement.
But the proposal may not go far enough, Bentsen said. “We remain concerned that the current regulatory framework is overly restrictive, impeding beneficial market activity at the expense of the economy and, ultimately, consumers.”
Consumer advocates warned that banks could exploit even a small loophole created by regulators. The rule’s complexity is a byproduct of lawmakers’ and regulators’ attempts to accommodate the industry’s initial concerns, they argue. And despite the rule’s complexity, banks have strongly rebounded since the financial crisis.
“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. This kind of corruption is common in Trump’s Washington,” said Sen. Elizabeth Warren (D-Mass.), a fierce Wall Street critic.
And it comes as regulators have recently begun warning that as the economy rebounds some banks are taking on more risks. “The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions,” Federal Deposit Insurance Corp. Chairman Martin J. Gruenberg said last week. “Some banks have responded by ‘reaching for yield’ through investing in higher-risk and longer-term assets.”
Along with the Federal Reserve, four other banking regulators, including the FDIC and the Commodity Futures Trading Commission, must also approve any changes to the rule. The FDIC is expected to vote Thursday.