The Federal Reserve is proposing to ease a rule aimed at defusing the kind of risk-taking on Wall Street that helped trigger the 2008 financial meltdown.
The Fed under new leadership Wednesday unveiled changes to the Volcker Rule, which bars proprietary trading: banks’ risky trading bets for their own profit with depositors’ money.)
The proposed changes would match the strictest applications of the rule to the 18 banks that do the most trading: those with at least $10 billion in trading assets and liabilities that account for 95 percent of all U.S. bank trading and include some foreign banks with U.S. operations, Fed officials said. Less stringent requirements would apply to banks doing less trading. The idea is to make it easier for banks to comply with the Volcker Rule without sacrificing their 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 they are in compliance,” Fed Chair Jerome Powell said. “Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements.”
The move comes amid other government efforts to loosen financial regulations, as President Donald Trump has promised.
Fed officials said they received helpful input from other U.S. financial regulatory agencies, including the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, which will discuss and possibly approve the proposal in their meetings in coming weeks.
It will be opened to public comment for 60 days.
It generally would assume a bank is in compliance with the rule if it records $25 million or less in daily profits or losses from each trading desk over 90 days.
The Volcker Rule, crafted by regulators 41/2 years ago, is a key plank of the landmark Dodd-Frank law intended to reduce the likelihood of another financial crisis and taxpayer-funded bank bailout. Trump has blamed Dodd-Frank for constraining economic growth.
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 an effective in averting future economic crises.
There has already been a volley of modifications that unwind the stricter regulations put into place during the Great Recession:
—Last week, Congress approved legislation rolling back the Dodd-Frank law, giving Trump a key win on a campaign promise as he quickly signed it into law. The Republican-led legislation, passed with help from some opposition votes, was aimed at especially helping small and medium-sized banks, including community banks and credit unions. It eases oversight and capital requirements (and Volcker Rule compliance) for about two dozen banks falling below new capital thresholds, including BB&T Corp., SunTrust Banks, Fifth Third Bancorp and American Express.
—After Trump installed him in November as acting director of the Consumer Financial Protection Bureau, Mick Mulvaney has shaped the watchdog agency established by the Dodd-Frank law and urged a curb on its powers. He has dropped a lawsuit against a payday lender, targeted agency enforcement powers in anti-discrimination cases and threatened a consumer complaint database. No banks or other financial institutions have been fined or sued since he took over.
Proprietary trading had become a huge money-making machine for Wall Street mega-banks like Goldman Sachs, JPMorgan Chase and Morgan Stanley. Proprietary trading 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 U.S. Public Interest Research Group, a consumer advocacy organization
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 regulation. 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.