Fri, Jun 01, 2018 - Page 10 News List

Fed moves to ease post-crisis rule on risky trading

AFP, NEW YORK

The US Federal Reserve on Wednesday took a first step to soften a key rule enacted after the 2008 financial crisis to limit high-risk trading by banks.

The Fed, in one of its first major moves under the leadership of US President Donald Trump’s appointees, said it aimed to improve implementation of the Volcker rule on bank trading to address criticism that the standards were vague and blocked important services to bank clients.

However, the proposed changes were largely panned by progressive lawmakers and groups, who said that the changes could be planting the seeds to another crisis.

The Fed is the first of five agencies that must approve any change.

The Volcker rule, included in the 2010 Dodd-Frank banking law and implemented in 2013, bars banks from engaging in trading with their own funds or from running their own hedge funds to take big bets on investments.

The rule, named for former Fed chair Paul Volcker, prompted large US banks to divest or shut down high-risk, high-return businesses that are not supposed to enjoy the benefit of federal deposit insurance.

However, banks complained that the measure wrongly lumps in safe activities, such as those to hedge against risk or those to provide key liquidity to clients.

Volcker himself suggested that some improvements in the rule were probably merited, but cautioned against going too far to ease restrictions.

“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 released by the Volcker Alliance, a non-partisan good government group.

“I trust the final rule will strongly maintain that position by, as intended, facilitating its practical application,” he added.

At a Fed board meeting to discuss the reform, officials said that banks would continue to be barred from trading with proprietary funds, but the changes would clarify that some activities are permitted.

Officials involved with Volcker implementation see “many opportunities to simplify and improve it in ways that will allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and standards,” Fed Chairman Jerome Powell said.

“Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements,” he said in a statement.

Among the proposed changes, the definition of “trading activity” would be modified to permit more activities, including nixing the automatic classification of assets held less than 60 days as short-term and subject to regulation.

Other changes would provide relief to banks with smaller trading businesses, clarify that certain kinds of market-making activities are allowed and permit foreign trading activities of non-US banks.

The toughest oversight would fall on 18 giant banks with more than US$10 billion in trading assets and liabilities that account for about 95 percent of all trades, US officials said. About half are of these banks are non-US.

However, the proposal drew immediate criticism in some circles.

The changes would result in “more banks betting against, rather than serving, their customers,” the Center for American Progress said. “This will further concentrate the power of the largest banks in the markets at the expense of all other investors and it will put the economy and taxpayers at greater risk of their failure.”

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