US regulators propose major loosening of Volcker rule

American regulators have proposed a major loosening of the Volcker rule ban on banks gambling their own money in the markets, as Trump appointees cut back a centrepiece of the reforms sparked by the last financial crisis.

Led by the Federal Reserve, regulators on Wednesday unveiled a range of changes that will soothe long-standing bank grievances, outlining a “Volcker 2.0” plan that they said would save banks from “undue burden” without sacrificing safety.

One key proposal would tailor Volcker compliance rules according to size so that only banks with the biggest trading operations would be subject to the strictest rules. Another would make it easier for banks to show they are engaged in market-making, which is permitted, rather than speculation.

According to prepared remarks for a Wednesday public meeting, Jay Powell, the Fed chair appointed by President Donald Trump, said regulators were seeking to "replace overly complex and inefficient requirements with a more streamlined set of requirements".

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With Trump critics accusing regulators of trying to undo Dodd-Frank, Mr Powell said the Fed was not challenging the view enshrined in the law that federally insured banks should not engage in proprietary trading. The proposal “is faithful to both the text and the spirit of the law”, he said.

Assets

The Fed’s proposal, which was sent to its board of governors ahead of the Wednesday meeting, would tailor the Volcker compliance regime to three different categories of banking entities, with 18 banks falling into the largest group with gross trading assets and liabilities of at least $10 billion (€8.6 billion).

It would also seek to simplify regulatory requirements by giving banks new quantitative “bright-line rules” to provide more clarity on what activities are prohibited and permitted.

In an important win for banks, regulators are proposing to drop a proprietary trading test that involved establishing the intent of traders. They want to replace it with a requirement for banks to establish their own “internal risk limits” to ensure they are meeting the demands of customers and not placing bets.

The Volcker rule, which ran to 964 pages of regulation, was designed to stop banks with government-insured deposits from putting taxpayer money at risk by engaging in dangerous market gambling with their own money.

Overly complex

Banks criticised the rule for being muddled and overly complex and blamed it for inhibiting market making activity meant to be permitted.

Fed is seeking public comment on its proposals and will be followed by four other regulators that jointly oversee the Volcker rule, including the Securities and Exchange Commission and the Federal Deposit Insurance Corporation.

The rule helped to drive significant structural changes on Wall Street by forcing banks to close their stand-alone proprietary trading desks and encouraging them to shrink the size of their trading books. It also prevented banks from investing in hedge funds and private equity firms.

According to prepared remarks, Randal Quarles, the Fed's regulatory chief, stressed that the proposal was a "best first effort" at simplifying and tailoring the Volcker rule.

“I view this proposal as an important milestone in comprehensive Volcker rule reform, but not the completion of our work,” he said.

– Copyright The Financial Times Limited 2018