Undoing Financial Regulations Piece by Piece
Five agencies have now voted to approve proposed changes to the Volcker Rule, a part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed changes would shift some supervision away from regulators and towards banks. In a time when Trump’s political appointees are doing their best to reverse financial safeguards and aid big banks, slackening the power of regulators is a step in the wrong direction.
The Volcker Rule was enacted in response to the 2008 financial crisis and prohibits proprietary trading, a practice in which banks use depositors’ money to trade for the profit of the bank, rather than for the benefit of consumers or for the purposes of hedging other bets. This type of risky trading contributed to the financial crisis and, because the government guarantees repayment on deposits even if the bank fails, taxpayers were forced to subsidize this behavior. Under the current Volcker Rule, banks must prove to regulators that all trading positions are held in order to support customers or hedge other investments.
The newly proposed, scaled-back version of the Volcker Rule would give much more power of oversight to the banks themselves. Among the changes proposed is a shift that would mean that banks no longer bear the legal burden of proving that a trade is acceptable. Instead, it is regulators that will have to prove that a trade is not allowable. In addition, the current rule assumes that any trades held for fewer than 60 days are proprietary trades. The newly proposed rule does away with this assumption. Banks would also be divided into three categories under the proposed rule, based on the value of their trading assets and liabilities. Banks with trading assets and liabilities exceeding $10 billion would be subject to the strictest regulations, while banks with under $1 billion in assets and liabilities would be presumed compliant.
Wall Street has frequently complained that the Volcker Rule is too hard to comply with and argues it is harmful to the proper functioning of financial markets. The proposed changes are therefore said to create more clarity and leeway for banks in complying with the rule, though given the record profits of banks, it’s clear they have not been suffering. In reality, the proposed Volcker Rule changes are part of a wider effort to tear down the consumer financial safeguards that were put into place through the Dodd-Frank law. Though the proposed new version of the Volcker Rule maintains restrictions on proprietary trading and does not leave this banking activity unregulated, when viewed in the context of other deregulatory measures under the Trump administration, the proposed rule helps to leave the banking industry vulnerable to another disaster.
If the Volcker Rule is so difficult for banks to comply with, as they argue, our nation’s leaders should reinstate Glass-Steagall’s solid wall between commercial and investment banking. Trump has said that he is in favor of a return to the Glass-Steagall law, which provided a complete prohibition on investing with depositors’ funds, and was repealed in 1999.
Despite Trump and the Republican Party’s support for Glass-Steagall, we have not seen Congress or the Administration move in this direction. Instead, Trump has continually given key positions to industry insiders who are willing to work in support of big banks. This favorable climate in Washington has, in turn, emboldened banks to push for a deregulatory agenda, such as the current push to weaken the Volcker Rule.
Rather than giving more leeway to banks to gamble with taxpayer-insured deposits, there should be increased enforcement of the Volcker Rule as it currently stands. And, as mentioned, the ultimate solution would be to reinstate a modernized Glass-Steagall to supersede the more limited prohibition provided through the Volcker Rule.
Fed regulatory chief Randal Quarles has said, “I view this proposal as an important milestone in comprehensive Volcker Rule reform, but not the completion of our work.” This statement makes it seem likely that there will be future proposals which have the potential to go further in deregulating risky trading by big banks. The original Volcker Rule proposal was developed jointly by multiple agencies, all of which have now approved the proposed changes to weaken it. The proposal must still go through a public comment period, meaning that the changes will not be enacted right away.
The creation of Federal Deposit Insurance Corporation to protect bank customers’ deposits went hand-in-hand with a prohibition on gambling with those same deposits. It’s time to go back to that clearer, simpler rule. We need a government focused on protecting taxpayers from future bailouts rather than on opening the door to Wall Street banks to reengage in the sorts of risky activities that make another financial crisis more likely.