Trump’s regulators set to deliver new victory for banks
President Donald Trump’s team of regulators is set to hand banks another big win by increasing their freedom to take short-term risks, just a week after Trump signed the first major deregulation bill since the 2008 Wall Street crash.
Five independent agencies, starting with the Federal Reserve on Wednesday, will propose simplifying one of the key regulations designed to avert another crisis: a rule that prevents banks from making trades to profit from short-term price changes in the markets.
Story Continued Below
The so-called Volcker rule — a 2013 regulation named after the former Fed chairman who came up with the concept — has long been criticized by the industry as convoluted, costing big banks millions of dollars to comply with and perhaps billions more in revenue.
But even the bureaucrats, who have sought to encourage trades that are good for the financial system while banning those that are merely profit-driven gambles, have been unsatisfied with their current approach.
Some details of the proposal have already leaked out, boosting hopes from banks that the changes will give them a much clearer picture of when they’re allowed to make quick trades with stocks, bonds and other financial assets. But those details have also fed fears from financial reform advocates that regulators could end up hobbling the regulation and endangering the economy.
“This proposal is going to be a major weakening of the rule,” predicted Marcus Stanley, policy director at Americans for Financial Reform, warning that it risked turning the regulation “into a dead letter.”
Despite the obscure terms and acronyms that fill the 1,000-page regulation, its contents strike at the heart of how the U.S. financial system operates.
The rule is a step back toward the era when banks weren’t allowed to mix consumer and investment banking, under a now-repealed provision enshrined in the Depression-era law known as the Glass-Steagall Act.
But rather than reinstate that restriction wholesale, the Volcker rule tries to protect depositors’ money from being used for risky bets by banks.
The regulation was mandated by the 2010 Dodd-Frank Act, the landmark law that led to sweeping new restrictions on financial institutions. Yet even the rule’s namesake, former Fed Chairman Paul Volcker, complains that his original, straightforward idea was weighed down by the input of too many lobbyists.
Under the rule, traders are given leeway when it comes to potentially dangerous bets made on behalf of a client; for example, if a client wants to trade a financial product for which there is not yet a market, a bank might have to conduct trades to create one, a process known as market making.
There are multiple other exemptions to the short-term trading ban, such as making an investment to balance out the risk of other holdings, known as hedging; or underwriting an initial public offering of a company’s stock.
But some in financial markets have argued that the confusion about what’s acceptable under the rule has hurt the ability of small and midsized companies to raise funding through the stock market.
“Whenever you take market participants out of the market, you’re hoping other people can come in and fill that gap, but that didn’t happen here,” said Chris Iacovella, CEO of Equity Dealers of America, which represents brokerages.
With less market participation by banks, investing in smaller businesses has become even more expensive, directing capital instead to big-name companies, he said.
“To the extent that you allow more players to come in and buy and sell into the marketplace, you put the oil back into that engine, and you make it run a lot smoother,” Iacovella said.