Despite pushback from some regulators in Congress, newest Volcker rule update will allow banks—in certain circumstances—to invest or sponsor hedge funds and private equity funds.
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 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. 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.