WASHINGTON — Federal regulators on Thursday proposed weakening key post-financial crisis restrictions on risky trading, handing Wall Street another victory in rolling back tough industry regulations.
The proposed changes would lift restrictions on big banks, such as Goldman Sachs and JPMorgan Chase, investing in venture capital and other types of funds.
The effort comes a decade after risky trading was blamed for contributing to the near collapse of the U.S. financial sector and is part of a sweeping industry deregulation under the Trump administration that has helped boost banks to record profits.
The most recent proposal addresses a key part of the “Volcker Rule” – one of the complex regulations to come out of 2010′s financial reform law, the Dodd Frank Act. Regulators spent years crafting hundreds of pages of rules aimed at stopping taxpayer-insured banks from taking on the same type of risks as hedge funds.
Restricting risky trading under the rule, which was named for Paul Volcker, a former chairman of the Federal Reserve, has made the financial system safer, supporters of the rule say. But the industry has called it too cumbersome and time-consuming and spent years calling for changes.
Regulators weakened a section of the rule last year, simplifying the process for determining which types of trading are permitted and which aren’t. This year, they are proposing to go even further. The proposal would eliminate a 3 percent cap on ownership of a venture capital fund. It would also allow them to invest in debt-based funds among other changes.
The objective, said Randal Quarles, vice chair of the Federal Reserve, is to simplify “the Volcker rule in light of our experience with the rule over six years of implementation.”
Greg Baer, president of the Bank Policy Institute, an industry lobbying group, said the proposal is “all gain and no pain.” It will “allow banks to get back to some important traditional commercial banking and asset management activities that the current rule prohibits, helping businesses grow and consumers build savings,” he said in a statement.
Federal Reserve Gov. Lael Brainard said in a statement she agreed with some of the proposed changes. But, she said lifting the restrictions on investing in venture capital “will weaken core protections in the Volcker rule and enable banking firms again to engage in high-risk activities.”
Some critics said the proposed changes would allow Wall Street to return to the type of risky behavior that contributed to the global financial crisis. “The Volcker Rule ban is now being turned into Swiss cheese, full of expansive loopholes that Wall Street will exploit,” said Dennis M. Kelleher, chief executive of Better Markets.
The public has until April to comment on the proposal. In addition to the Federal Reserve, the changes are subject to approval by four other regulators: the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.
The proposal will help “sharpen the focus of the Volcker Rule on those activities that presented risk to the federal banking system,” Comptroller of the Currency Joseph Otting said. “We are helping banks serve their customers more effectively and act as the engines of economic opportunity they should.”
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