Bit by bit, the Trump administration is making headway in its push to loosen Wall Street’s leash.
The latest target is the Volcker Rule, a landmark constraint that was key to Washington’s drive to make the industry safer after the 2008 financial crisis. Regulators handpicked by President Donald Trump will propose a makeover of Volcker in the coming weeks, adding to efforts already underway to ease rules that have put government watchdogs in control of everything from bank capital to what lenders can do with their profits.
Most of the changes have been described as tweaks, not an evisceration of the post-crisis rule book. But the cumulative effect for banks could be higher earnings, lower compliance costs and trading desks feeling emboldened to ramp up the risk.
Volcker, named for former Federal Reserve Chairman Paul Volcker, restricted banks from making speculative market bets for their own benefit, rather than on behalf of clients. Dialing it back has been near the top of Wall Street’s wish list for years as the industry argues that it has dried up market liquidity, is overly complex and is difficult to comply with.
In a much anticipated rewrite that’s expected to be released by the end of the month, the Fed and other agencies are poised to address some of those concerns.
The regulators plan to scrap a restrictive presumption that short-term trades -- those held by banks for less than 60 days --- automatically violate Volcker, said three people familiar with the matter. Instead, banks would have leeway to conclude that their trades comply with the rule, putting the onus on regulators to challenge such judgments, said the people who asked not to be named because the revamp hasn’t been made public.
Read more: a QuickTake on the Volcker Rule
Banks have gone to pains to say that their problems are less with the Volcker Rule’s aim than with the complexity of following it. John Gerspach, Citigroup Inc.’s chief financial officer, in March bemoaned the fact that his bank has three separate regulators asking separate questions and requesting different figures on the Volcker Rule.
“In its current form, the compliance with it, the number of data points that one has to generate, is quite complicated,” Goldman Sachs Group Inc. CFO Marty Chavez said last month.
Still, the rule restricts a lucrative business. Trading revenue at the biggest global investment banks has dropped by a collective $40 billion since 2010, the year the Dodd-Frank Act was signed into law, according to Coalition Development Ltd. While technology and monetary policy have factored into the decline, industry observers also cite the Volcker Rule as a culprit.