Bank Regulators Finalize Loosening of Volcker Rule

The logo for JPMorgan Chase & Co. appears above a trading post on the floor of the New York Stock Exchange. (AP Photo/Richard Drew, File)

WASHINGTON (CN) — Five financial authorities signed off Thursday on loosened regulations to let banks make certain investments and participate more heavily in hedge fund management.

The change to the Volcker Rule, as it is known, will take effect October 1. 

Jelena McWilliams, chairwoman of the Federal Deposit Insurance Corporation, called the rule straightforward yet “one of the most challenging post-financial crisis rules for both regulators and banking entities to implement.” Her agency is one of four independent from the Fed that on Thursday finalized rule changes similar to those approved in January.

The Volcker Rule refers to section 619 of the 2010 Dodd-Frank Act — named after former Fed Chairman Paul Volcker, who died in December. Adopted after the 2008 financial crisis, the law aimed to prevent the kind of excesses that led to the financial crisis and Great Recession, setting four rules for how financial institutions would follow the Bank Holding Company Act of 1956.

McWilliams said in a statement Thursday that the change gives entities a better understanding as to which trading practices go against the rule.

Some of those barred practices include trading with government-insured deposits, a practice that played a role in the 2008 crash. Co-investments —or a simultaneous investment made by both a bank and private equity or hedge fund — would also no longer be prohibited under the changes.

Martin Gruenberg, a member of the FDIC’s board of directors, said in a statement the rule went beyond clarifying what provisions for investment banks were allowed to use. For instance, banks would now be able to purchase assets from private equity funds or use forms of “intra-day extensions of credit.” 

“Today’s final rule goes far beyond streamlining or clarifying the covered fund provisions of the Volcker Rule as asserted in the preamble,” he said. “It would severely weaken the restrictions on relationships between banks and covered funds. It would reintroduce the types of high-risk investments and activities that contributed to the 2008 financial crisis, and risk repeating those mistakes in the current uncertain environment created by Covid-19.”

Before his death, Volcker, too, criticized the push to ease restrictions. In a letter to Fed Chairman Jerome Powell, he noted that “well-compensated industry lobbyists have long sought to weaken” the rule.

“Put simply, the U.S. is in its longest economic expansion in recorded history,” Volcker wrote in August 2019. “Bank profits are strong … and the unemployment rate is the lowest it has been in more than 50 years. These facts belie any justification for the new rule.”  

The U.S. Senate voted to ease these rules in 2018 with legislation that would increases the threshold at which banks are considered essential to the system, from $50 billion to $250 billion. That legislation also altered the exemption for banks with less than $10 billion in assets. 

President Donald Trump made reversing Obama-era banking protections a cornerstone of his 2016 campaign. 

The stock of investment banking companies, like JP Morgan Chase and Goldman Sachs, rose significantly after Thursday’s announcement, gaining a 2% bump.

In addition to the Fed’s Board of Governors and the FDIC, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency approved the changes.

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