The US Federal Reserve is discussing specific proposals for easing the “Volcker Rule,” one of the financial industry’s most-hated restrictions which imposes a prohibition on risky proprietary trading by Wall Street banks.
Jay Powell, the Fed chair appointed by President Donald Trump, told the Financial times regulators were seeking to “replace overly complex and inefficient requirements with a more streamlined set of requirements”.
The proposal reflects the widespread agreement that material changes to the controversial regulation would be inevitable, in a bid to streamline bans on specific types of bank trading put in place after the 2007-2009 financial crisis.
Named for former Fed Chairman Paul Volcker, the rule is meant to stop some of the risky banking practices that contributed to the economic meltdown. It was approved by five key US regulators in 2013.
The regulation makes it illegal for big banks to use their customer’s deposits, through government-insured loans, to make speculative, risky bets.
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However, the industry has long argued that Volcker rule is too complex that it blocks needed market liquidity vehicles and prompting lenders to go too far in retreating from markets.
Trump is translating campaign rhetoric into reality
The Fed is taking the lead in revising the restrictive rule and making it more friendly to banks. The draft proposes changes that cancel the so-called “60-day rebuttable presumption,” which want to give firms more freedom to trade and soften constraints on their ability to hold positions for 60 days or less. The current rules look at such short-term holdings as the kinds of activity the Volcker was intended to discourage in a bid to prevent banks from triggering another financial meltdown.
In a statement prepared ahead of the Fed’s meeting, which is expected to approve the proposal unanimously, Powell said: “This proposed rule will tailor the Volcker rule’s requirements by focusing the most comprehensive compliance regime on the firms that do the most trading. Firms that do more modest amounts of trading will face fewer requirements.”
Trump is once again translating his campaign rhetoric into reality. The president made repealing the Dodd-Frank act one of his campaign’s focal points.
However, the timing of an actual replacement for Dodd-Frank remains unclear as only Congress can rewrite the legislation. But between now and the possible passage of overhauling legislation, Trump has been able to make many changes without involving lawmakers by appointing new regulators and ordering them to ignore most of the Dodd-Frank rules.