Big banks are poised for a long-sought win.
Regulators on Wednesday are expected to unveil their rewrite of a post-financial crisis rule that barred banks from making risky trades with their own money, including customer deposits.
The changes are not expected to be sweeping, but they are expected to make it easier for banks to gain exemptions.
The provision, known as the Volcker rule, was a landmark piece of Dodd-Frank, the financial reform law enacted in 2010. It bans what’s known as proprietary trading, and blocks banks from taking big stakes in hedge funds or private-equity firms.
The rule was named for Paul Volcker, a former Federal Reserve chair. Banks have said for years that the rule is too complex and difficult to comply with.
Five federal agencies — the Fed, the SEC, the FDIC, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission — have been working on the rewrite.
It is not expected to lift the ban on proprietary trading. But it is expected to soften the rule. Banks say it’s too difficult now to determine what’s proper trading, the buying and selling of securities that helps financial markets function smoothly, and what’s not.
“We want banks to be able to engage in market making and provide liquidity to financial markets with less fasting and prayer about their compliance with the Volcker rule,” Randal Quarles, the Fed’s vice chairman for supervision, said in a speech to bankers in March.
Wall Street analysts are expecting the rewrite to be modest.
“This is not a radical change, and the results for the biggest banks may be less than the headlines would suggest,” Jaret Seiberg, an analyst at Cowen Washington Research Group, wrote in a note to clients on Tuesday.
Still, for regulators, it’s yet another tilt toward the industry since President Trump took office.
Thousands of community and regional banks won a reprieve last week from some of the toughest post-crisis rules under Dodd-Frank. Among the changes signed into law by Trump, banks with less than $10 billion in assets will no longer have to comply with the proprietary-trading rule.
The initial plan by regulators is expected to eliminate certain requirements to make it easier for banks to hedge against losses.
Bankers have long lamented that steep compliance costs made it harder to reap the benefits of exemptions tucked into the rule, which came into effect in 2015. It took years for regulators to finalize a plan that would prevent banks from making speculative market bets with their own money.
The Fed will be the first among the agencies to consider the proposal on Wednesday. And it will probably be months before changes take effect.
“A final rule in 2018 is no sure thing,” Ian Katz, an analyst at Capital Alpha Partners wrote in a report this week.
The FDIC, which meets on Thursday, is the next agency scheduled to consider the plan. The CFTC has scheduled its meeting for June 4. Each agency must sign off on changes and vote on whether to seek public comment.
Isaac Boltansky, director of policy research at Compass Point Research & Trading, said in an analyst note that changing the rule will be a “lengthy process,” with five agencies in charge.
House lawmakers are hoping to streamline that process by proposing the Fed be in charge of overseeing how banks adhere to the Volcker rule. But the effect could be limited, Boltansky said.
