Volcker Rule Revamp Adds to Trump’s Steady, Bit-by-Bit Deregulation

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.

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.

Read More: 1,000 Cuts to Dodd-Frank: Trump Has Spurred a Deregulatory Wave

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.

— With assistance by Yalman Onaran, Will Mathis, and Laura J Keller