Mnuchin Said to Start Review That Could Ease Volcker Rule’s Bite

  • Treasury directs regulators to examine key trading restriction
  • U.S. agencies expected to look at market-making definition

Treasury's Mnuchin Said to Push Volcker Rule Review

The Trump administration is quietly helping Wall Street in its campaign to chip away at the toughest trading restriction imposed on banks after the financial crisis.

At a closed-door meeting in Washington on Monday, Treasury Secretary Steven Mnuchin directed five key agencies to re-examine what’s permitted under the Volcker Rule, said two people familiar with the matter. The provision, widely despised on Wall Street, bars banks from wagering on markets with their own capital. Mnuchin’s action could lead to changes that give banks more flexibility to trade without running afoul of the rule.

Volcker has been controversial since its inclusion in the 2010 Dodd-Frank Act. It was meant to prevent lenders with federally-backed deposit insurance from making big market bets that could lead to outsized losses. But critics say it has made banks too conservative, prompting a retrenchment from certain markets that has dried up liquidity.

‘Volcker rule should be changed or eliminated,’ CME Group CEO Terry Duffy told Bloomberg on May 1.

Source: Bloomberg

Wall Street has frequently complained about how regulators defined banned trades under Volcker that purely benefit banks, as opposed to permitted transactions that firms do for clients. While banks are supposed to have leeway to help customers buy and sell securities, finance executives say the text of the 2013 rule was too vague, making it difficult to sort out what’s allowed. 

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Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein, whose firm has lobbied heavily on Volcker, underscored some of those concerns earlier this week, arguing that the rule has hamstrung banks from serving customers’ needs.

Mnuchin’s request, made at a meeting of the 15 agencies that make up the Financial Stability Oversight Council, indicate he’s not waiting for the results of the administration’s ongoing review of financial rules to start pursuing changes sought by the industry.

The two-hour gathering at the Treasury Department was the first FSOC meeting at which Mnuchin focused the agenda on President Donald Trump’s policy goals. The Treasury secretary established a working group on Volcker consisting of agencies that regulate banks and securities firms, said the people, who asked not to be named because the meeting wasn’t public.

In a brief public summary of the Monday meeting, the Treasury said FSOC discussed efforts to “assess the efficacy” of Volcker.

The agencies now reviewing the rule are the same ones that wrote it: the Federal Reserve, Securities and Exchange Commission, Federal Deposit Insurance Corp., Commodity Futures Trading Commission and the Office of the Comptroller of the Currency.

Treasury spokeswoman Molly Meiners declined to comment, as did spokesmen for the five agencies.

Obama Holdovers

The Fed and FDIC are still led by officials appointed by former President Barack Obama. Though Mnuchin leads FSOC as Treasury secretary, Obama holdovers represent half of its 10 voting members on the council, which Dodd-Frank created to spot threats to the financial system.

The Trump administration is making progress in filling agencies with its nominees. Former Wall Street lawyer Jay Clayton was sworn in as SEC chairman last week. On May 5, Keith Noreika took over as acting head of the OCC. Noreika, an attorney who had represented banks in private practice, told the Wall Street Journal this week that regulators need to do a better job explaining what’s allowed under Volcker.

Mnuchin wants the various agencies involved to work together, and potentially issue new guidance that will give banks more clarity, the people said. Doing so would be among the fastest and easiest ways to soften Volcker’s impact.  

A wholesale re-writing of the rule would probably take years, as multiple regulators would have to agree on any changes after seeking public comment. While Congress could try to repeal Volcker, and a bill is moving through the House, Republicans are unlikely to get the support they need from Senate Democrats to pass legislation.

Making Billions

In January, Mnuchin said he backs the aim of Volcker, because “proprietary trading does not belong” in banks with a government backstop. But he said he’s concerned the rule has constrained liquidity and that lenders might benefit from a better explanation of what constitutes proprietary trading as opposed to making markets for clients.

Blankfein offered a similar critique in a Tuesday interview with CNBC. He said restrictions on what banks can do for their customers prevent companies and investors from engaging in transactions that are “beneficial to the financial markets.”

Marcus Stanley, policy director at Americans for Financial Reform, said he’s dubious that Volcker is handcuffing lenders.

“You’re talking about banks that are making tens of billions a year on trading activity,” said Stanley, whose group supports aggressive oversight of Wall Street. “It doesn’t seem to me that they’ve exited the markets.”

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