US Fed moves to ease post-crisis rule on risky bank trading
NEW YORK, May 31, 2018 (BSS/AFP) – The Federal Reserve took a first step
on Wednesday to soften a key rule enacted after the 2008 financial crisis to
limit high-risk trading by banks.
The Fed, in one of its first major moves under the leadership of President
Donald Trump’s appointees, said it aimed to improve implementation of the
Volcker rule on bank trading to address criticism that the standards were
vague and blocked important services to bank clients.
But the proposed changes were largely panned by progressive lawmakers and
groups, who warned the changes could be planting the seeds to another crisis.
The Fed is the first of five agencies that must approve any change.
The Volcker rule, included in the 2010 Dodd-Frank banking law and
implemented in 2013, bars banks from engaging in trading with their own
funds, or from running their own hedge funds to take big bets on investments.
The rule, named for former Fed chair Paul Volcker, prompted large US banks
to divest or shut down high-risk, high-return businesses that are not
supposed to enjoy the benefit of federal deposit insurance.
But banks complained the measure wrongly lumps in safe activities, such as
those to hedge against risk, or those to provide key liquidity to clients.
Volcker himself suggested some improvements in the rule probably were
merited, but cautioned against going too far to ease restrictions.
“What is critical is that simplification not undermine the core principle
at stake — that taxpayer-supported banking groups, of any size, not
participate in proprietary trading at odds with the basic public and
customers’ interests,” Volcker said in a statement released by the Volcker
Alliance, a non-partisan good government group.
“I trust the final rule will strongly maintain that position by, as
intended, facilitating its practical application,” he said.
At a Fed board meeting to discuss the reform, officials said banks will
continue to be barred from trading with proprietary funds, but the changes
would clarify that some activities are permitted.
US-BANKING-LAW-REGULATION 2 LAST NEW YORK
Fed Chair Jerome Powell said officials involved with Volcker
implementation see “many opportunities to simplify and improve it in ways
that will allow firms to conduct appropriate activities without undue burden,
and without sacrificing safety and standards.”
“Our goal is to replace overly complex and inefficient requirements with a
more streamlined set of requirements,” he said in a statement.
– Rising risk? –
Among the proposed changes, the definition of “trading activity” would be
modified to permit more activities, including nixing the automatic
classification of assets held less than 60 days as short-term and subject to
Other changes would provide relief to banks with smaller trading
businesses, clarify that certain kinds of market-making activities are
allowed, and permit foreign trading activities of non-US banks.
US officials said the toughest oversight would fall on 18 giant banks with
more than $10 billion in trading assets and liabilities that account for
about 95 percent of all trades. About half are of these banks are non-US.
But the proposal drew immediate criticism in some circles.
The changes will result in “more banks betting against, rather than
serving, their customers,” the Center for American Progress said.
“This will further concentrate the power of the largest banks in the
markets at the expense of all other investors, and it will put the economy
and taxpayers at greater risk of their failure.”
Bart Naylor, a financial policy advocate at Public Citizen, said easing up
requirements on smaller banks made sense, but he was generally troubled that
policymakers appeared much more fixated on easing bank requirements than on
ensuring the bank system is safe.
“We’re concerned that this empowers banks to do what they want to do and
that is gamble with funds made cheap and available by taxpayers,” Naylor said
in an interview.
The Fed proposal, which was developed in concert with four other agencies,
will now be subject to a 60-day public comment period.