Deregulation of the financial sector is well under way in Washington.
The Federal Reserve (the Fed), along with four other government entities, is proposing to simplify and water down the Volcker Rule.
The Volcker Rule, implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act, prohibits banks from engaging in risky trading behavior, including owning or having relationships with hedge funds or private equity funds. It prohibits proprietary trading, or using the money of depositors to make bets for bank profit.
In the buildup to the financial crisis and 2008 recession, banks participated in these now-prohibited activities on a large scale. These limits were designed to stop banks from putting themselves (and taxpayers, who bailed them out) at risk of failing again. But Wall Street has been a vocal advocate for itself, claiming the rules are too strict and require too much reporting.
The Fed proposes to streamline certain aspects of the Volcker Rule, while maintaining the overall intent of the rule to limit dangerous banking behavior.
The proposed changes allow banks greater freedom to focus on trading, and less time on checking boxes and submitting reports to regulators. For instance, currently the burden lies on the bank to prove that their trading activity meets standards — under the proposal, the burden will lie with regulators.
The Fed also proposes to ease up restrictions on smaller banks and assume banks that make less than $25 million in daily profits or losses are in compliance with the rule.
The Fed is proposing to adjust its definition of covered funds, which means in certain cases, some banks will be able to once again hold stakes in hedge funds.
Current Fed Chair Jerome Powell claims the rule changes will make it easier for banks to comply and for overseers to ensure compliance.
This move follows the passage in May 2018 of the president’s Economic Growth, Regulatory Relief and Consumer Protection Act, which made sweeping deregulatory changes. In fact, the Act already exempted banks with less than $10 billion in assets from the Volcker Rule. But the Fed’s proposal goes a step further to simplifying the rule for everyone.
The Fed is requesting public comment on the proposed changes. Comments need to be received by July 13, 2018 and can be submitted at the Federal Register.
Balancing regulation with profit
The goal of these changes is to stimulate the economy and grow bank ledgers. But lawmakers walk a fine line, as the result may well be a return to the banking and lending environment of the Millennium Boom. And if that sounds good to you, you’re forgetting about the last decade we spent recovering from the resulting crash.
The financial boom of the early- and mid-2000s was a direct result of decades of gradually loosened regulations. It was rewarding at the time, but the excitement of huge bank profits masked the incredibly risky trading behavior that led to the financial crisis. The Volcker Rule, while imperfect, was a step toward tying up these loose ends and preventing another big bubble and bust, not to mention the numerous harms consumers suffered.
But some say Dodd-Frank and specifically the Volcker Rule went too far and have limited bank growth (profits). With the Fed’s changes, it is these sceptics who have won out — whether this will prove to be a win for banks and consumers is yet to be seen.
Watch the markets closely in the coming years as the impact of fewer regulations unfolds in the financial markets, and by close association, the real estate market.