The announcement of the easing of regulations know as the “Volcker Rule” gave an immediate boost to bank stocks because the rule change could free up billions of dollars in capital in the banking industry.
The Volcker Rule was part of the overhaul of banking regulation approved in the Dodd-Frank Act passed by Congress in 2010 in an effort to curtail excesses that had led to the 2008 financial crisis, the country's worst banking crisis since the 1930s.
However, President Donald Trump had campaigned in 2016 on rolling back what he saw as over-regulation of the banks that he said had weighed on the economy by preventing the banks from making loans to qualified borrowers.
The Fed said the final rule, which will take effect on Oct. 1, is broadly similar to a proposal the agencies had put forward last January. The rule rollback, which was opposed by Democratic appointees at both the Fed and the Federal Deposit Insurance Corp., represents one of the biggest victories for the Trump administration's deregulation drive.
The Volcker rule, named for its chief proponent, the late Fed Chairman Paul Volcker, generally prohibited banks from engaging in proprietary trading and from acquiring ownership interests in hedge funds and private equity funds.
The looser restrictions approved on Thursday will allow banks to more easily make investments in various areas of venture capital. The rule changes will also allow banks to avoid having to set aside cash when making derivatives trades between different affiliates of the same firm. That change is expected to free up billions of dollars that banks will now have available for other investments.
Swaps are a form of derivatives trade in which two parties agree to exchange payments based on market movements such as changes in interest rates. A lack of transparency in this market was a key contributor to the 2008 financial crisis.
Before he died in December at age 92, Volcker criticized the rule change, saying it “amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis.”
Sen. Jeff Merkley, D-Oregon, a key proponent of the Volcker Rule in 2010, said supporters wanted to create a firewall between ordinary banking activities like taking deposits and making loans and high-risk hedge fund style activities.
“It was only a decade ago when millions of Americans paid the price for Wall Street gambling, in lost jobs, homes and life savings,” Merkley said in a statement. “Re-opening the Wall Street casino is the wrong path forward, one that puts all Americans' financial stability at risk.”
In addition to the Federal Reserve and the FDIC, the changes were endorsed by the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission.