Fed, other regulators approve changes to ‘Volcker rule’ to ease bank restrictions

Published: Oct 8, 2019 5:44 p.m. ET

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Brainard dissents, saying changes weaken ‘core protections’ put in place after financial crisis

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The Federal Reserve Building in Washington.

WASHINGTON — The Federal Reserve and four other regulatory agencies announced final approval Tuesday to changes in the “Volcker rule” passed after the 2008 financial meltdown to crack down on trading excesses that contributed to the crisis.

The changes were supported by the banking industry, which felt that the original rule seeking to prevent banks from speculative trading with government-insured deposits was too restrictive. But they were opposed by Wall Street watchdog groups and the rule’s namesake, former Fed Chairman Paul Volcker.

Fed board member Lael Brainard issued a rare dissent to the final rule. She said “it weakens the core protections against speculative trading within the banking federal safety net.”

The five agencies said the new rule would take effect on Jan. 1 with banks given a year to comply.

The liberalized rule would continue to prohibit banks from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. It also provides greater clarity for activities that will still be allowed under the law.

In her dissent, Brainard said that she was concerned that the new rule will significantly reduce the scope of investment activity that would be prohibited and would rely too much on the banks to self-police their own conduct.

President Donald Trump has been a vocal critic of the Dodd-Frank Act, the law passed after the financial crisis to reorganize the banking system and that includes the Volcker rule. He has said it was too restrictive on banking activities and has made loosening the regulations imposed on banks a big part of his deregulation effort since taking office.

In a letter to Fed Chairman Jerome Powell in August, Volcker, 92, said that the proposed rule went far beyond simplification.

“The new rule amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis,” Volcker wrote.

In addition to the Federal Reserve, the other agencies announcing adoption of the new rule on Tuesday were the Federal Deposit Insurance Corp., the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.

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