The Federal Reserve voted Wednesday to seek input on a proposal to simplify the Volcker Rule, a provision of the post-financial crisis reform law that blocked banks from trading on their own accounts.
The proposed alterations would tailor compliance based on the size of a firm’s trading assets, benefiting smaller institutions; clarify that firms trading within internal risk limits are conducting permissible market-making or underwriting activity; and limit the rule’s impact on foreign activities of foreign banks.
The Fed will accept comments for the next two months, a key step toward final adoption and implementation of the changes drafted by the industry’s five government oversight agencies, which also include the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.
“The specific elements of this proposal are drawn from experience — the shared experience of all five responsible agencies and of policymakers at those agencies with wide and varied backgrounds during the four years that the Volcker Rule regulations have been in force,” said Randal K. Quarles, the Fed’s vice chairman for supervision.
The Volcker Rule was one provision of the 2010 Dodd-Frank Act, the government’s signature effort to tighten restrictions on Wall Street in order to prevent a repeat of the 2008 crisis, when a bubble in the $15 trillion U.S. real estate market collapsed. That downturn imperiled banks with huge real-estate holdings and forced Washington to funnel hundreds of billions of dollars into bailouts to shore up the financial system even as many U.S. residents lost their homes and jobs.
Further changes to the Volcker Rule — named for Paul Volcker, the former Fed chairman who championed it — that were authorized under a financial regulation bill negotiated by Sen. Mike Crapo, the head of the chamber’s Banking Committee, will be developed in a separate rule-making process, the Fed said.
The measure that advanced Wednesday “is broadly positive for the mega banks with large trading operations as well as for regional banks less involved with trading, as it should reduce trading costs and permit them to hold more inventory to facilitate trading,” said Jaret Seiberg, an analyst with Cowen Washington Research Group.
“This is obviously a large and complicated proposal that lawyers will comb over for months as the banks offer up their suggestions for what works and what falls short in the plan.”
David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said his group looks forward to reviewing the proposal.
“We are pleased that regulators understand that the Volcker Rule is currently impeding important financing for American businesses,” he added. Indeed, banks have long complained that the rule caused confusion over when they could hold securities legally, as part of the process of creating a market for clients with less-liquid notes, and when they would be deemed in violation of the Volcker Rule.
JPMorgan Chase, the largest U.S. lender by assets, and Morgan Stanley declined to comment.
“We will review the proposal and continue to engage with policymakers to ensure the Volcker Rule is implemented efficiently,” said Kevin Fromer, head of the Financial Services Forum. “Greater efficiency would allow our member institutions to comply with the intent of the legislation while allowing them to meet the needs of their clients.”
