The Federal Deposit Insurance Corp. board voted 3-1 Tuesday to give big banks more leeway to make risky short-term bets in financial markets by loosening a landmark but highly contentious regulation known as the Volcker rule.
The FDIC and four other independent agencies have dropped their proposal to tie the rule to a strict accounting standard — a move that banks argued would have made it burdensome by subjecting additional trades to heightened supervision.
Instead, regulators will give banks the benefit of the doubt on a much wider range of trades, according to the text of the final rule.The move is sure to soothe lenders and panic backers of the 2010 Dodd-Frank Act, the historic law that mandated the rule in an effort to protect depositors’ money from being used by banks to turn a quick profit on short-term price changes in stocks, bonds and other financial assets.
The Volcker rule, a 2013 regulation named after former Federal Reserve Board Chairman Paul Volcker, who came up with the concept, bars banks from making risky trades on their own behalf and restricts them from owning hedge funds or private equity funds. It has long come under fire for its complexity and has been a source of dissatisfaction for the regulators themselves.
The rewrite is an attempt to clarify what kinds of activity would be exempt from the proprietary trading ban for market-making, hedging or underwriting purposes. Regulators aim to introduce a separate revamp of the covered-funds provision of the rule this fall.
Comptroller of the Currency Joseph Otting on Tuesday signed the revised rule. Three other agencies — the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission — must still approve it.
The new rule — the latest step by President Donald Trump's regulators to roll back post-financial crisis rules — would go into effect Jan. 1. Banks will have until Jan. 1, 2021, to become compliant but may opt in earlier.
Among other provisions, the revamp would create a presumption of compliance for trades held for longer than 60 days, the inverse of the current version of the rule, which presumes that any investment held for less than 60 days is banned, with the onus on banks to argue that a given trade is exempt.
The accounting standard that regulators proposed last year was meant to clear up ambiguity surrounding the intent standard under the 60-day provision, which ties the legitimacy of a bank’s position to its intent in making the short-term trade.
Under the final rule, the short-term intent prong will only apply to banks that are not subject to the market risk-capital rule or that do not elect to apply the market risk capital standard.
The inclusion of the accounting provision in the original Volcker 2.0 proposal had been key in securing the support of Martin Gruenberg, then FDIC chairman and now a regular board member at the agency.
Gruenberg, an Obama appointee, voted against the revised rule Tuesday morning, saying it would “effectively undo” the Volcker rule’s ban on proprietary trading.
As amended, “the Volcker rule will no longer impose a meaningful constraint on speculative and proprietary trading by banks and bank-holding companies benefiting from the public safety net” of insured deposits, Gruenberg said.
Article originally published on POLITICO Magazine