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Federal Reserve moves to ease post-crisis rule on risky bank trading

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The Federal Reserve took a first step on Wednesday to soften a key rule enacted after the 2008 financial crisis to limit high-risk trading by banks.

[NEW YORK] The Federal Reserve took a first step on Wednesday to soften a key rule enacted after the 2008 financial crisis to limit high-risk trading by banks.

The Fed, in one of its first major moves under the leadership of President Donald Trump's appointees, said it aimed to improve implementation of the Volcker rule on bank trading to address criticism that the standards were vague and blocked important services to bank clients.

But the proposed changes were largely panned by progressive lawmakers and groups, who warned the changes could be planting the seeds to another crisis. The Fed is the first of five agencies that must approve any change.

The Volcker rule, included in the 2010 Dodd-Frank banking law and implemented in 2013, bars banks from engaging in trading with their own funds, or from running their own hedge funds to take big bets on investments.

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The rule, named for former Fed chair Paul Volcker, prompted large US banks to divest or shut down high-risk, high-return businesses that are not supposed to enjoy the benefit of federal deposit insurance.

But banks complained the measure wrongly lumps in safe activities, such as those to hedge against risk, or those to provide key liquidity to clients.

Mr Volcker himself suggested some improvements in the rule probably were merited, but cautioned against going too far to ease restrictions.

"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," Mr Volcker said in a statement released by the Volcker Alliance, a non-partisan good government group.

"I trust the final rule will strongly maintain that position by, as intended, facilitating its practical application," he said.

At a Fed board meeting to discuss the reform, officials said banks will continue to be barred from trading with proprietary funds, but the changes would clarify that some activities are permitted.

Fed Chair Jerome Powell said officials involved with Volcker implementation see "many opportunities to simplify and improve it in ways that will allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and standards." "Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements," he said in a statement.

RISING RISK?

Among the proposed changes, the definition of "trading activity" would be modified to permit more activities, including nixing the automatic classification of assets held less than 60 days as short-term and subject to regulation.

Other changes would provide relief to banks with smaller trading businesses, clarify that certain kinds of market-making activities are allowed, and permit foreign trading activities of non-US banks.

US officials said the toughest oversight would fall on 18 giant banks with more than US$10 billion in trading assets and liabilities that account for about 95 per cent of all trades. About half are of these banks are non-US.

But the proposal drew immediate criticism in some circles.

The changes will result in "more banks betting against, rather than serving, their customers," the Center for American Progress said.

"This will further concentrate the power of the largest banks in the markets at the expense of all other investors, and it will put the economy and taxpayers at greater risk of their failure."

Bart Naylor, a financial policy advocate at Public Citizen, said easing up requirements on smaller banks made sense, but he was generally troubled that policymakers appeared much more fixated on easing bank requirements than on ensuring the bank system is safe.

"We're concerned that this empowers banks to do what they want to do and that is gamble with funds made cheap and available by taxpayers," Mr Naylor said in an interview.

The Fed proposal, which was developed in concert with four other agencies, will now be subject to a 60-day public comment period.

AFP