Easing Volcker Rule Restrictions for Big Banks

Future changes in the Volcker Rule restrictions on big banks’ trading have been backed by the Fed. These changes will loosen compliance requirements for all banks and provide a sense of relief for firms with small trading desks. The Fed will be easing the rule designed to curb risky trading in the wake of the financial crisis. The new plan will place fewer audits of individual securities and derivatives transactions for bulge bracket banks like J.P. Morgan and Goldman Sachs. This means banks will spend less time providing compliance and traders would be given more freedom to buy and sell securities.

However, critics claim that this proposal will be risky since banks could create loopholes that allow them to engage in risky trading. The proposal is part of a broader regulatory rollback that includes a recently enacted law easing rules on small banks and less aggressive leadership at the Consumer Financial Protection Bureau. Regulators said they want to enforce the rule differently because the existing practices are costly.

In the new proposal, the Fed and other agencies wouldn’t audit individual transactions as often, but they would check to see that bank managers set limits on traders aligned with expected customer demand. Law’s allow hedging and market-making on customers’ behalf. Powell says, “The proposal will allow firms to conduct appropriate activities without undue burden and without sacrificing safety and soundness.” On the other hand, banks say “We’re all somewhat perplexed and challenged by the implementation.”

The proposal could revolutionize the banking infrastructure, but the loopholes could potentially weaken rather than advance the implementation of the rule. It would lead to banks betting against, rather than service their client’s needs. Banks have spent millions of dollars developing systems to measure trading activity and model future customers’ demand. Not only that, but banks will have to reevaluate how they define whether a trade is violating the Volcker rule or not. However, the proposal would lessen the tensions to justify hedging trades and seeks to reduce the impact of the rule on foreign-owned banks’ overseas activities.

The Fed is separately reviewing capital restrictions, including the leverage limits, which could loosen for some banks. Regulators are also proposing to create three new categories of banks. Those with more than $10 billion in trading assets and liabilities would face the highest expectations under the Volcker rule. The newly proposed Volcker rule and the three categories of banks would redesign the banking industry and divide firms in this space.