The plan to relax the regulation won’t bring back the glory days, but it may make traders at large firms more willing to be active, bringing more liquidity to debt markets where banks take more principal risk, according to a trader and a bank adviser, who asked not to be named talking about regulation.
The Fed has led the rewrite, though there is broad agreement on how to proceed among all five agencies responsible for the rule. While unveiling the changes will kick off a lengthy process that could lead to more tweaks, it builds on plans to overhaul other constraints on the banks, particularly capital requirements.
Regulators have already moved to ease the leverage ratio and stress tests, both of which determine how much capital banks must use to fund their operations instead of returning to shareholders through dividends and buybacks.
The rule changes could aid Trump’s goal of stoking lending by freeing up billions of dollars of capital. But critics say doing so could set banks down a dangerous path.
“There’s no evidence of a credit shortage in the U.S. economy and banks are more profitable than ever,” said Sheila Bair, who led the FDIC during George W. Bush’s administration. “When you lower capital requirements, it’s either going to make the shareholders richer or let the banks get bigger. Is either of those worth the risk of lowering the safety of the financial system?"
The Treasury Department laid the groundwork for Trump’s deregulatory agenda in a blueprint released last year. Among other things, it called for doing away with many of Volcker’s most subjective demands.
The main component of Volcker was banning what’s known as proprietary trading, the practice of banks trading for themselves rather than for clients. The rule assumes all the short-term positions are forbidden unless the banks seek one of a narrow list of exemptions, including market making for customers and certain hedging of risks. That’s led to pushback from the industry, as well as some acknowledgment from regulators on both sides of the political aisle that it could be simplified.
“SIFMA appreciates the growing recognition by policymakers of the problems with the Volcker Rule,” Robert Toomey, managing director and associate general counsel at the financial lobbying group, said in a statement. “We remain concerned that the current regulatory framework is overly restrictive, impeding beneficial market activity at the expense of the economy, and ultimately consumers.”
While enemies of the rule have called for its repeal, erasing Volcker would require a new law from Congress. The revision from regulators represents the limits of what the agencies can do as long as the rule remains on the books.
With the changes, more of the rule’s weight falls to how closely those same regulators enforce it.