Trump's Push to Ease Wall Street Rules Hindered by Missteps

(Bloomberg) -- President Donald Trump has repeatedly vowed to loosen Wall Street’s leash, but some of regulators’ most meaningful efforts to revamp post-crisis constraints on big banks are running into problems.

Take the Volcker Rule, which restricts banks from making risky market bets with their own money. Under Trump, federal agencies sprinted to rewrite it, issuing an overhaul plan last May. Yet instead of showering regulators with praise, industry lobbyists blasted Volcker 2.0, arguing that it might be even more confining than the version already on the books.

Now watchdogs are going back to the drawing board to rethink a controversial method they came up with for determining which trades are banned by Volcker. That will probably require re-proposing the whole thing, people familiar with the matter said last week, a step that could push banks’ timeline for getting relief into next year.

Bank Capital

Another key proposal from Trump-appointed regulators that’s hit a stumbling block would revise what’s known as the leverage-ratio rule -- a requirement that lenders maintain a minimum level of capital against their assets so they can withstand losses. A rewrite released last year could let Wall Street firms re-deploy a whopping $121 billion now locked up in their banking subsidiaries.

In their rush to get something out, the Federal Reserve and Office of the Comptroller of the Currency issued their plan for changing the leverage ratio last April without the participation of another agency that must be involved: the Federal Deposit Insurance Corp.

At the time, the decision made some sense. The FDIC was being run by a holdover from the Obama administration because the Senate hadn’t yet confirmed Jelena McWilliams, the banking lawyer who Trump picked to lead the regulator.

But McWilliams raised a caution flag last month, saying it could be legally questionable for her agency to just sign off on the Fed and OCC’s proposal after the fact. She said the rule may need “some kind of re-proposal.” If that happens, it would restart a months long bureaucratic process.

‘Bad Things’

“The irony is they’re not only doing bad things; they’re doing bad things badly,” Dennis Kelleher, the president of Better Markets, said of regulators. His Washington-based advocacy group urges stiff rules for financial firms.

Spokesmen for the Fed, OCC and FDIC declined to comment on the status of their rule proposals.

Dialing back Volcker and the leverage ratio are at the top of Wall Street’s de-regulatory wish list, and delays could have consequences beyond testing bankers’ patience.

The Fed is tied up with other priorities, including easing constraints on community and regional lenders as required by an overhaul of the 2010 Dodd-Frank Act that Congress passed last year. If Wall Street-friendly rule changes get postponed long enough, they could get derailed should a Democrat take the White House in 2020. And if Democratic lawmakers also win majorities in the House and Senate, they would be empowered to overturn any regulations approved in the last months of Trump’s term.

No Pitchforks

The rule named for former Fed chairman Paul Volcker is one of the most contentious measures in Dodd-Frank. Advocates say it stopped deposit-taking banks from acting like hedge funds, dangerous behavior that contributed to the 2008 meltdown. But Wall Street argues the Volcker rule is unnecessarily complex, prompting lenders to reject all sorts of client trades that the regulation was never meant to capture.

V. Gerard Comizio, a banking lawyer at Fried Frank in Washington, said it shouldn’t come as a surprise that regulators are having issues revamping a rule as dense as Volcker. He argued that last year’s proposal was so complicated -- with the agencies posing more than 300 questions for commentators to weigh in on -- that some saw it as more testing the waters than a legitimate effort.

“There aren’t pitchforks and torches marching toward the Fed from the industry,” Comizio said.

Bankers Complaining

Senator Sherrod Brown of Ohio, the top Democrat on the Banking Committee, has a different take. He said if regulators re-propose Volcker, it will be another example of their willingness to do Wall Street’s bidding in the Trump era.

“It’s no surprise that when Wall Street banks complained that the proposed rewrite of the Volcker Rule wasn’t weak enough, Trump regulators went to work watering it down further,” Brown said in a Thursday statement.

Craig Phillips, a senior Treasury Department official, said at an industry conference Monday that he suspects the rule “might have to be re-submitted” and that Treasury looks forward to further refining and “better calibrating” Volcker.

On the leverage ratio, McWilliams told reporters in February she favors the FDIC, Fed and OCC moving in tandem, predicting the rule may need a redo to get there. Neither the Fed nor the OCC have taken a position on her remarks. OCC spokesman Bryan Hubbard said it’s up to the FDIC to address what it believes should be the next step.

To be sure, the financial industry has notched several wins under Trump and the regulatory tone has shifted to a lighter touch after years of aggressive oversight.

Softening Rules

Compliance burdens that have been softened include the Fed’s annual stress tests that evaluate whether banks can keep lending during a crisis and so-called living wills meant to prepare lenders for hypothetical bankruptcies.

And on Volcker, Comizio said “the industry will take what it can get.”

--With assistance from Elizabeth Dexheimer.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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