Big Banks to Get a Break From Limits on Risky Trading

Regulators have viewed the Volcker rule as too complicated to enforce. Both the current Fed chairman, Jerome H. Powell, seen here in March, and his predecessor, Janet L. Yellen, have called for simplification of the rule.

Big banks are getting a big reprieve from a postcrisis rule aimed at curbing risky behavior on Wall Street.

Federal bank regulators on Wednesday unveiled a sweeping proposal to soften the Volcker Rule, a cornerstone of the 2010 law that was enacted after the financial crisis to rein in risky trading. The change would give Wall Street banks more freedom to make their own complex bets — activities that can be highly profitable but also leave them more vulnerable to losses.

The rule, part of the broader Dodd-Frank law, was put in place to prevent banks from making unsafe bets with depositors’ money. It took five agencies three years to write it and has been criticized by Wall Street as too onerous and harmful to the proper functioning of financial markets. On Wednesday, the Federal Reserve proposed easing several parts of the rule, and four other regulators are expected to soon follow suit, kicking off a public comment period that is expected to last 60 days.

The loosening of the Volcker Rule is part of a coordinated effort underway in Washington to relax rules put into place in the wake of the 2008 financial crisis. Big banks, emboldened by President Trump’s deregulatory agenda and a more favorable political climate in Washington, have begun pressing for changes to several postcrisis rules, including the Volcker Rule.

Last week, Mr. Trump signed into law a bipartisan bill that will free thousands of small and medium-size banks from the Dodd-Frank law, and on May 21, he signed a law rescinding a consumer rule aimed at preventing discrimination by auto lenders. The Fed and the Office of the Comptroller of the Currency recently proposed easing limits on how much the largest banks can borrow and the Fed also proposed changes to the stress tests that banks must undergo each year to determine whether they can withstand an economic downturn.

Mr. Trump’s acting director of the Consumer Financial Protection Bureau, Mick Mulvaney, has also engaged in a rapid series of regulatory changes since November, including halting new investigations, freezing new hires and preventing the agency from collecting certain data from banks.

Regulators said on Wednesday that the primary intent of the Volcker Rule would remain intact and that banks would not be allowed to return to the wild days of proprietary trading, when traders made big bets with the bank’s money and sometimes lost huge sums. But they said the rule needed to be simplified so that banks could more easily comply with it and Washington could adequately enforce it.

“The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance,” the Fed chairman, Jerome H. Powell, said at a board of governors meeting. “Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements.”

The Volcker Rule, while not the most significant postcrisis regulation, is arguably the most recognizable. It was included at the behest of Paul Volcker, a former Fed chairman who warned that Wall Street was recklessly gambling with house money. On Wednesday, Mr. Volcker, now the chairman of a nonpartisan think tank called the Volcker Alliance, welcomed efforts to simplify compliance with the rule but said in a statement, “What is critical is that simplification not undermine the core principle at stake — that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests.”

He added: “I trust the final rule will strongly maintain that position by, as intended, facilitating its practical application.”

All three sitting Fed governors voted to release the proposal, which will be open to public comment and could change before being finalized. At a brief Fed meeting to discuss the rule, officials stressed that the changes were merely refinements that stemmed from their experience overseeing the process of putting the rule into place, including what did and did not work.

Bank lawyers said the Fed was clearly trying to insulate itself from criticism that it was giving banks too much leeway by declaring that the changes were based on experience overseeing the rule.

“For people who are saying ‘you’re going too easy on the banks,’ their rejoinder is ‘we have data saying that’s not true,’” said Douglas Landy, a partner at Milbank, Tweed, Hadley & McCloy who helps some of the largest banks comply with the Volcker Rule. “It’s the type of language you might not see in a Fed report before the financial crisis or Dodd Frank when they weren’t as aware of the political implications.”

The six largest United States banks have all lobbied either directly or through trade groups for changes to the rule. Representatives for JPMorgan Chase, Goldman Sachs, Morgan Stanley and Wells Fargo declined to comment on the proposal while representatives of Bank of America and Citigroup had no immediate comment.

But the changes would alter how much time the banks have to spend proving they are following the Volcker Rule and give them more leeway to determine which types of trades comply. It would also shift the burden of proof for determining whether a trade qualifies under Volcker away from the bank to the regulators.

Now, banks must prove that each trade serves a clear purpose that goes beyond a speculative bet by showing regulators specifically how each trade either meets customer demands or acts as a hedge against specific risks. That had curtailed trading in a variety of assets like derivatives, corporate bonds and other complex products.

Under the changes outlined Wednesday, banks will no longer have to offer proof for each specific trade and would instead have to enact strict internal controls and compliance programs to ensure they are meeting the requirements of the Volcker Rule. The change would allow banks to more freely engage in hedging, in which they execute trades in an effort to counteract risk in other parts of their businesses.

Regulators would also give banks more leeway to determine what levels of trading activity are appropriate for meeting customer demands on each of their trading desks. That would be a shift from the current rule, which sets rigid standards that do not differentiate between trading desks that serve different assets, like corporate bonds and derivatives.

In a briefing for journalists on Wednesday, an agency official said letting banks set their own risk and activity limits would help reduce the difficulties big banks face in trying to prove that their various market activities, which can differ greatly from one another, conform to a set of rigid standards.

Regulators will also continue to collect trading information from the largest banks, which are subject to strict oversight and monitoring as part of the enhanced supervisory process put into place after the crisis.

Lael Brainard, a Fed governor appointed by President Barack Obama, said on Wednesday that she supported the proposal, as long as the chief executives of banks were willing to personally attest to future claims that their institutions were adhering to the restriction on speculative betting.

“The requirement of C.E.O. attestation is critical for this to work, in my view,” Ms. Brainard said in prepared remarks.

Other changes would group banks into categories according to how much Wall Street trading they do. Banks engaging in the least amount of trading would have the easiest set of requirements to fulfill under the rule, a change that dovetails with Congress’s recent move to exempt the smallest banks from having to comply with the Volcker Rule at all.

The changes are already prompting outrage among consumer advocates and other financial watchdogs, who warn it will allow a return to the Wild West days on Wall Street.

“This proposal is no minor set of technical tweaks to the Volcker Rule, but an attempt to unravel fundamental elements of the response to the 2008 financial crisis, when banks financed their gambling with taxpayer-insured deposits,” Marcus Stanley, policy director at Americans for Financial Reform, said in a statement.

Senator Elizabeth Warren, the Massachusetts Democrat who has been among the most vocal critics of changes to Dodd-Frank, called the proposal the latest example of corruption in Mr. Trump’s Washington.

“Even as banks make record profits, their former banker buddies turned regulators are doing them favors by rolling back a rule that protects taxpayers from another bailout,” Ms. Warren said.

But business groups applauded watering down of the Volcker Rule on Wednesday as a step in the right direction — one that would allow banks to operate more efficiently.

The Securities Industry and Financial Markets Association said that the Fed vote showed that regulators were finally recognizing the “unintended negative impact” of the complex rules governing the financial system. And the American Bankers Association praised policymakers for “taking sensible steps to better tailor regulations consistent with risk.”

David Hirschmann, president of the United States Chamber’s Center for Capital Markets Competitiveness, said that it was time for a more efficient Volcker Rule.

“We are pleased that regulators understand that the Volcker Rule is currently impeding important financing for American businesses,” Mr. Hirschmann said.

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