(Bloomberg) -- Wall Street’s long campaign to chip away at the toughest trading restriction imposed on banks after the financial crisis is finally paying off under President Donald Trump.
The Federal Reserve Board, now led by Trump appointees, on Wednesday took the most concrete step yet to roll back the Volcker Rule, which was key to Washington’s efforts to make the industry safer after the 2008 meltdown. Fed governors voted 3-0 to seek comment on proposed changes, kicking off an administrative process aimed at significantly reducing compliance costs for financial firms such as Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.
The rule is meant to bar banks with federally-backed deposit insurance from suffering out-sized losses by restricting their ability to bet with their own capital. Financial firms have said the rule is unnecessarily complex and almost impossible to adhere to.
Trump-picked regulators have shown a greater willingness to listen to such grievances, and are proposing a revamp that would give banks more leeway to presume their trades comply with the rule.
“The objective behind this proposal is straightforward: simplifying and tailoring the Volcker Rule in light of our experience with the rule in practice,” said Randal Quarles, the Fed’s point man on bank regulation. “This is a goal that is shared among all five agencies and among policymakers at those agencies with many different backgrounds.”
The revisions aren’t just a rollback, Quarles said, calling them “the fruit of long and shared experience” and not “assumptions of a few recently appointed individuals.”
Over the next week, agencies including the Securities and Exchange Commission and the Federal Deposit Insurance Corp. are expected to join the Fed in proposing the changes. The proposal will be released for public comment, after which regulators will have to put it to a final vote before the changes can take effect.
The rule, named for former Fed Chairman Paul Volcker, banned what’s known as proprietary trading -- the practice of banks investing for their own benefit rather than buying or selling securities to fulfill requests from customers. It also restricted lenders’ ability to invest in hedge funds and private-equity firms.
The changes would “broadly simplify and tailor” the rule without negatively affecting the safety of banks, according to a summary of the plan.
The proposal would remove an assumption that positions held by lenders for fewer than 60 days are proprietary trades. And it would scrap a part of the test for determining whether a trade is proprietary, replacing it with new criteria based on how the bank accounts for the trades, according to the summary.
The plan also sets up a tiered system for compliance based on a bank’s trading assets and liabilities, with the most stringent requirements applying to companies with $10 billion or more, according to the summary.
Regulators are also proposing to make it easier to take advantage of exemptions, such as one that gives broad flexibility to execute trades that serve as hedges against potential losses. Banks now have to submit documentation to prove they are hedging, requirements they say are unreasonable.
The proposal broadens exemptions banks can seek for underwriting and market-making to permit activities “designed not to exceed reasonably expected near-term demand of clients, customers, or counterparties,” according to the summary. In a key shift from the current rule, the proposal will let banks set their own risk limits for market-making and underwriting activity. Regulators will be able to review the limits on an ongoing basis.
It also seeks to ease the impact of the rule on foreign banks’ operations outside the U.S.
Fed Governor Lael Brainard, who worked at the Treasury Department during the Obama administration when the Volcker Rule was created as part of the Dodd-Frank Act, said she supported the changes. The proposal, she noted, will ensure that the “core” of the regulation -- prohibiting banks from speculative trading -- is maintained.
“While the purpose of the Volcker Rule is compelling, our experience with its implementation over the past few years suggests that the interagency rule has turned out to be needlessly cumbersome in practice,” she said in remarks prepared for the Fed board meeting to consider proposing the changes.
Liberal groups called the Fed plan a dangerous giveaway to Wall Street that could fuel the next financial crisis.
“This proposal is no minor set of technical tweaks to the Volcker Rule, but an attempt to unravel fundamental elements of the response to the 2008 financial crisis, when banks financed their gambling with taxpayer-insured deposits,” said Marcus Stanley, policy director at Americans for Financial Reform.
Volcker himself weighed in, saying he welcomes efforts to simplify compliance with the rule he’s credited with championing as an adviser to then-President Barack Obama.
“What is critical is that simplification not undermine the core principle at stake -- that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests,” Volcker said in a statement. “I trust the final rule will strongly maintain that position by, as intended, facilitating its practical application.”
While banks will likely welcome the changes, the revamp isn’t expected to trigger a return of proprietary trading or prompt lenders to rehire some of the high-flying traders who fled for hedge funds after the financial crisis. A full repeal of Volcker is seen as improbable, because it would require an act of Congress.
Regulators generally give the public months to weigh in on their proposals to overhaul rules, and then must hold a second round of votes to make changes binding.
Quarles, the Fed’s vice chairman of supervision, said the plan was a “best, first effort” at simplifying the rule, indicating that further tweaks may be coming.
“I view this proposal as an important milestone in comprehensive Volcker Rule reform, but not the completion of our work,” Quarles said.
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