Bank stocks surge after regulators ease financial crisis-era Volcker Rule
Federal financial regulators said Thursday they plan to make it easier to let banks invest in venture capital funds and also relax some limitations on derivatives trading.
The moves, a loosening of some of the more onerous parts of the so-called Volcker Rule, lifted bank stocks.
The Volcker Rule, part of the broader Dodd-Frank bill enacted in 2010 following the meltdown of big banks in 2008, sought to crack down on risky behavior by Wall Street firms. It was named after former Federal Reserve chair Paul Volcker, who passed away in December.
Many banks and brokerages were using their company’s own money to invest in derivatives such as mortgage-backed securities and other complex financial instruments.
The eventual collapse of the subprime mortgage market — loans to borrowers with poor credit histories — created a ripple effect that led to the collapse of Bear Stearns, Lehman Brothers, Washington Mutual and countless other firms.
Giant banks wound up needing to receive hundreds of billions of dollars in federal bailout money to stop the bleeding.
The Federal Deposit Insurance Corporation, Federal Reserve Board of Governors, Office of the
Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading
Commission issued a final rule on Thursday “to modify and clarify the covered fund provisions” of the rule, according to the news release.
The regulators said that the changes wlll allow banks to “allocate resources to a more diverse array of long-term investments in a broader range of geographic areas, industries, and sectors than they may be able to access directly.”
Shares of Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Bank of America (BAC) and Citigroup (C) each shot up about 2% to 3%, which helped to turn around the broader market as well.
The new rules are estimated to potentially free up as much as $40 billion for the big banks.
It’s also the latest example of how regulators in the Trump administration are undoing much of the Obama-era rules put into place to curb bad behavior by big banks.
The FDIC, Fed and other agencies had already neutered the part of the Volcker rule that restricted so-called proprietary trading by banks, the practice of investing with the firm’s own funds instead of bets for clients.
The rule change, according to the regulators, will do three things:
1. Facilitate capital formation by providing banking entities greater flexibility in sponsoring funds that provide loans to companies so banks can allocate resources to a more diverse array of long-term investments.
2. Protect safety, soundness and financial stability by not allowing banks to engage in any activity that is not currently permissible if conducted on their balance sheets.
3. Provide greater clarity and certainty about what activities are permitted, which will improve supervision and implementation of the Volcker Rule.
In a statement on the rule change, Rob Nichols, president and CEO of the American Bankers Association said, “We welcome the measured steps taken today by the FDIC, which will allow banks to further support the economy at this challenging time for the nation.”