The so-called Volcker rule — a 2013 regulation named after the former Fed chairman who came up with the concept — has long been criticized by the industry as convoluted, costing big banks millions of dollars. | Getty Trump’s regulators deliver new victory for banks

President Donald Trump’s team of regulators has handed the nation's banks another big win by increasing their freedom to take short-term risks, just a week after Trump signed the first major deregulation bill since the 2008 Wall Street crash.

Five independent agencies, starting with the Federal Reserve on Wednesday, are proposing to simplify one of the key regulations designed to avert another crisis: a rule that prevents banks from making trades to profit off short-term price changes in the markets.


The so-called Volcker rule — a 2013 regulation named after the former Fed chairman who came up with the concept — has long been criticized by the industry as convoluted, costing big banks millions of dollars to comply with and perhaps billions more in revenue.

But even the bureaucrats, who have sought to encourage trades that are good for the financial system while banning those that are merely profit-driven gambles, have been unsatisfied with their current approach.

Banks hope the changes will give them a much clearer picture of when they’re allowed to make quick trades with stocks, bonds and other financial assets. But reform advocates fear that regulators are hobbling the rule and endangering the economy.

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“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,” said Marcus Stanley, policy director at Americans for Financial Reform.

Despite the obscure terms and acronyms that fill the 1,000-page regulation, its contents strike at the heart of how the U.S. financial system operates.

The rule is a step back toward the era when banks weren’t allowed to mix consumer and investment banking, under a now-repealed provision enshrined in the Depression-era law known as the Glass-Steagall Act.

But rather than the wholesale reinstatement of that restriction, the Volcker rule tries to protect depositors’ money from being used for risky bets by banks.

The regulation was mandated by the 2010 Dodd-Frank Act, the landmark law that led to sweeping new restrictions on financial institutions. Yet even the rule’s namesake, former Fed Chairman Paul Volcker, complains that his original, straightforward idea was weighed down by the input of too many lobbyists.

Volcker released a statement saying he hoped the rewrite would make the rule more practical to apply. “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 said.

Under the rule, traders are given leeway when it comes to potentially dangerous bets made on behalf of a client; for example, if a client wants to trade a financial product for which there is not yet a market, a bank might have to conduct trades to create one, a process known as market making.

There are multiple other exemptions to the short-term trading ban, such as making an investment to balance out the risk of other holdings, known as hedging; or underwriting an initial public offering of a company’s stock.

But some in financial markets have argued that the confusion about what’s acceptable under the rule has hurt the ability of small- and mid-sized companies to raise funding through the stock market.

“Whenever you take market participants out of the market, you’re hoping other people can come in and fill that gap, but that didn’t happen here,” said Chris Iacovella, CEO of Equity Dealers of America, which represents brokerages.

With less market participation by banks, investing in smaller businesses has become even more expensive, directing capital instead to big-name companies, he said.

“To the extent that you allow more players to come in and buy and sell into the marketplace, you put the oil back into that engine, and you make it run a lot smoother,” Iacovella said.

Fed regulatory chief Randal Quarles says it's “inarguable” that the regulation has hurt markets.

At the Fed’s open board meeting on the proposal, Chairman Jerome Powell said 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 proposal will likely have the biggest impact on regional and mid-sized banks with perceptible trading activity that aren’t major players like JPMorgan Chase or Goldman Sachs, though banks of all stripes will benefit.

That’s because the proposal tailors restrictions depending on an institution’s level of trading activity.

Meanwhile, the smallest banks that don’t do much trading are now exempt entirely from the rule, thanks the new bank deregulation law.

The proposed Volcker rule rewrite removes the need for bank examiners to determine a trader’s intent to define the universe of trades they should be watching.

And rather than continuing to focus on whether each trade can be tied to customer demand, it instead allows banks to develop a trading strategy, with regulator-approved limits on the amount of risk they can take on.

This also might not be the end of revisions to the rule.

"This proposal represents our best first effort at simplifying and tailoring the Volcker rule," Quarles said at the central bank’s board meeting. "I view this proposal as an important milestone in comprehensive Volcker rule reform, but not the completion of our work."

All but one of the five regulatory chiefs involved in drafting the proposal were appointed by Trump, but even some Obama-era regulators had expressed a desire to simplify the rule.

“The hope was that, as the application of the rule and understanding of the metrics resulting from it evolved, it would become easier to use objective data to infer subjective intent,” said former Fed regulatory chief Dan Tarullo in his farewell speech in April 2017. “This hasn’t happened, though. I think we just need to recognize this fact and try something else.”

The only remaining Obama appointee involved in the Volcker rewrite is FDIC Chairman Martin Gruenberg, who is set to be replaced imminently by a longtime Senate aide and former banker, Jelena McWilliams. Gruenberg’s participation had been a signal to banks not to expect sweeping changes, given his history of being highly skeptical of rolling back any post-crisis rules.

But it has provided little comfort for some backers of the rule, who are sounding the alarm about a big change: Banks will no longer have to prove that a trade is acceptable under the rule. Instead, regulators will have to prove that it’s not.

Tyler Gellasch, a former Senate aide who helped craft the Volcker language in Dodd-Frank, said the regulation was already weaker than its statutory authors had hoped.

“Volcker as it was implemented covered a fraction of what we expected,” Gellasch said before the release of the revised rule. And if the change is as broad as he fears, “it raises the question of whether it’s more intellectually honest to just repeal the whole thing,” he added.

Gellasch said if regulators are actually getting rid of the presumption that trades held for less than 60 days fall under the scope of the rule, “what they’ve done is they’ve made it much, much less likely that you’ll see anything ever identified as [illegal under the rule] again, except a major blowup.”

But sources close to the matter said regulators should not aim to make the rule so specific that they are dictating to executives how to run their institution. The ban on short-term speculative trading remains in place, and bank CEOs are required to attest that they’ve put in place proper controls to prevent such trading. At some point, they are responsible for the risks they’re taking, they said.

The biggest banks, meanwhile, have expressed mild enthusiasm for the expected changes, arguing that financial reform advocates unfairly cast even the smallest changes as disastrous.

The proposal “saves a lot of paperwork both for banks and regulators but doesn’t materially change the substance or allow any new activities,” said a senior official at a large bank heavily involved in markets. “Not that anyone will believe that.”