Published: Thu, May 31, 2018
Markets | By Otis Pena

Wall Street Profits Just Aren't High Enough, Darn It

Wall Street Profits Just Aren't High Enough, Darn It

The Federal Reserve is proposing to ease a rule aimed at defusing the kind of risk-taking on Wall Street that helped trigger the 2008 financial meltdown.

The Volcker Rule, which took four years to write and runs at around 1,000 pages, has forced many Wall Street banks to overhaul their trading operations and hive off billions of dollars worth of hedge funds and private equity funds. The high-risk activity is known as proprietary trading.

Among the biggest proposed changes outlined Wednesday: Banks will no longer have to specifically prove that each of their trades serves a clear objective that goes beyond a speculative bet. They come at a time when the banking industry is already hauling in record profits - $56 billion during the first quarter of 2018 - and regulators are warning that some banks have been taking on more risks. Typically, financial institutions make money by charging a fee for transactions on behalf of their clients, but proprietary trading allows banks to make direct bets on the market in the same way that individual investors might.

"This proposal is no minor set of technical tweaks to the Volcker Rule, but an attempt to unravel fundamental elements of the response to the 2008 financial crisis, when banks financed their gambling with taxpayer-insured deposits", Marcus Stanley, policy director at Americans for Financial Reform, a nonprofit advocacy group, said in a statement.

"The proposal will address some of the uncertainty and complexity that now make it hard for firms to know how best to comply, and for supervisors to know that they are in compliance", Fed Chairman Jerome Powell said in prepared remarks before a Board of Governors meeting.

Many industry lobbyists have said the rule is unnecessarily complex and burdensome.

It also would assume generally that a bank is in compliance with the rule if it records $25 million or less in daily profits or losses from each trading desk over 90 days.

The proposal will be opened to public comment for 60 days.

Big banks are getting a big reprieve from a postcrisis rule aimed at curbing risky behaviour on Wall Street.

That's in line with a set of Dodd-Frank reforms passed by Congress and signed by President Donald Trump earlier this month.

"I view this proposal as an important milestone in comprehensive Volcker Rule reform, but not the completion of our work", said Quarles, a Trump nominee.

But it's not just the central bank that will be needed to approve revisions to the Volcker Rule.

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The banking bill Trump signed last week offered the industry some relief: It exempted small financial institutions with less than $10 billion in total assets from the rule.

Regulators are proposing to relieve banks of that responsibility.

Fed Gov. Lael Brainard, who was appointed by President Barack Obama, said in a statement Wednesday that she supported the proposal as long as the chief executives of banks were willing to personally attest to future claims that their institutions were adhering to the restriction on speculative betting.

The Volcker rule was meant to be a simple way to cut risk taking at banks and avert future government bailouts.

"Given the irresistible riches generated by proprietary trading, it is inevitable that weakening the Volcker Rule will result in banks again pushing the envelope, gaming the system and ramping up their unsafe trading". He has dropped a lawsuit against a payday lender, targeted agency enforcement powers in anti-discrimination cases and threatened a consumer complaint database.

U.S. Congress wrote the broad strokes of the Volcker Rule into law, but five regulators oversee the rule and wrote its finer details. The proposal shifts the onus on proving some trades are prohibited from the bank to the regulators.

In theory, the Volcker rule is supposed to stop banks from engaging in what's known as "proprietary trading"-using money on the bank's own balance sheet to engage in speculative trades meant to generate profit for the bank".

The proposed changes to the rule are expected to boost the profits of some of the industry's biggest players, including Goldman Sachs and JPMorgan Chase, industry analysts say. Ireland was an associate general counsel at the Fed.

But the banking industry has complained for years about the difficulty in determining what type of trading is too risky. When big banks engage in market-making, they use their own money to take the opposite side of a customer's trade: They buy or sell an investment to help execute the trade.

There has already been a volley of modifications that unwind the stricter regulations put into place during the Great Recession.

Trump has named three others to fill vacancies on the board: two economics professors and the Kansas banking commissioner. He has said the package of rules under Dodd-Frank should be overhauled but not scrapped.

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