Wall Street banks will soon be able to boost investments in venture capital funds and pocket billions of dollars they’ve had to set aside to backstop derivatives trades as U.S. regulators continue their push to roll back post-crisis constraints.
The Federal Reserve,
The revisions will complete what watchdogs appointed by President
Thursday’s separate reversal of the interaffiliate margin requirement for swaps trades could free up an estimated $40 billion for Wall Street banks, though regulators added a new threshold that limits the scale of margin that can be forgiven.
- Volcker 2.0 allows banks to take stakes in venture-capital funds that were previously banned in an effort to provide “greater flexibility in sponsoring funds that provide loans to companies.” The change is mostly similar to what regulators proposed last year.
- The Volcker Rule changes were also approved by the Securities and Exchange Commission and Commodity Futures Trading Commission.
- The FDIC board passed the new rule in a 3-1 vote, with Chairman
Jelena McWilliamssaying the changes “should improve both compliance and supervision.” Democratic board member Martin Gruenbergopposed the move, saying it leaves Volcker “severely weakened” and “risks repeating the mistakes” of the 2008 financial crisis.
- Volcker 2.0 didn’t include all of the industry’s demands for relief. In a March comment letter,
Goldman Sachs Group Inc.had urged regulators to eliminate certain Volcker interpretations that have “restricted our ability to invest in certain incubator companies that provide capital and ‘know-how’ to startup companies and entrepreneurs.” The agencies didn’t act on that request.
- In scrapping the requirement that banks post margin for trades between affiliates, regulators did add a new threshold to prevent banks from abusing the relief: If a firm operating under the old rule would have had to set aside initial margin exceeding more than 15% of its so-called “Tier 1” capital, then it still has to set aside margin that surpasses that amount. The demand, which is meant to boost the safety and soundness of the new approach, will force banks to continue calculating on a daily basis what their margin requirements would have been under the rule that’s been eliminated.
- The industry and regulators argued that requiring margin for interaffiliate transactions made it difficult banks to manage their risks. But critics say forcing banks to maintain an extra cushion against losses helped protect subsidiaries that are backed by the federal government, including through deposit insurance.
- The FDIC’s Gruenberg opposed the change to swaps rules, arguing that it removes a critical protection for banks. Fed Governor
Lael Brainardreiterated that concern, saying in a statement that she dissented from the Fed’s approval because she fears the deregulatory move “could again leave banks exposed to the buildup of risky derivatives.”
Wall Street’s Win Streak With Trump Regulators Dangles by Thread Trump Regulators Hand Wall Street Banks a Big Win on Swaps Rule
(Updates with index price in fifth paragraph.)
To contact the reporter on this story:
To contact the editors responsible for this story:
© 2020 Bloomberg L.P. All rights reserved. Used with permission.