The Volcker Rule, a financial-crisis-era Wall Street regulation, may soon be "material[ly] change[d]," according to Federal Reserve Vice Chairman Randal Quarles.
"The Volcker Rule is an example of a complex regulation that is not working well," Quarles said earlier this month at the Institute of International Bankers Conference.
First introduced by the 2010 Dodd-Frank Act, the Volcker Rule was designed to minimize risky behavior by banning banks from proprietary trading, or trading with their own money, for themselves, rather than clients. Unpopular with banks since its inception and the subject of intense lobbying for years, the rule has come under fire from Trump, whose administration has cut back on financial regulations in the hopes of jumpstarting economic growth.
Quarles has characterized the rule as being unnecessarily complex, particularly in its definitions of proprietary trading, covered funds, and market making, which is a lawful activity banks use to help their clients buy and sell assets. The rule's existing definition relies upon a "number of complex requirements that are difficult or impossible to verify in real time," Quarles said, which is a burden to banks, since they must extend considerable effort to determine whether or not particular transactions or positions fit the rules. A lack of clarity to the definitions also means that they unintentionally cover activities they never meant to regulate.
Named after Paul Volcker, a former Federal Reserve chairman, the rule was intended to prevent firms from making large markets bets that might cause economic instability. But some critics say the rule has made banks overly cautious, and has caused reduction of spending in certain markets and unnecessarily curtailed liquidity.
Quarles says that the Fed will unite with other regulatory bodies who were initially involved in crafting the rule, including the Securities and Exchange Commission, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. to revise the regulation. Quarles hopes to give banks more leeway to stockpile securities that they bet customers will want to trade.
Quarles did not specify a timeline for the change, but expected it would be soon. In a bid to boost transparency, Quarles said he plans to submit the changes to public comment before they go into effect. The Fed is also mulling further changes that will make regulations more flexible for foreign banks operating in the U.S., including removing restrictions on how firms can invest in foreign funds.
While changes to the Volcker Rule will be a boon for banks, the changes are not likely to make all parties happy. Since the Volcker Rule - which took 3 years to draft, and was only fully implemented in 2015 - investors in bank stocks have been less anxious about traders incurring massive losses for their institutions. There hasn't been a large trading meltdown at a major U.S. bank since JPMorgan Chase's infamous London Whale, which occurred prior to the implementation of the Volcker rule. And some analyses of the financial crisis have confirmed that proprietary trading was one of many factors that lead to a weakened financial system.