US Regulators Ease Banking Regulations

Published On July 1, 2020

Following years of Republican-led lobbying, U.S. regulators unveiled new banking regulations that simplify business for large banks with complex trading and investment portfolios. In a win for the industry, regulators significantly reworked the burdensome financial crisis-era Volcker Rule, which restricted banks from operating proprietary trading units and from acquiring ownership stakes in hedge funds or private equity funds.

Criticized for its overly cautious guidelines, regulators announced the overhauling of the Volcker Rule, clearing the way for banks to make larger investments in riskier entities like venture capital funds. Significant revisions were made to the “covered funds” portion of the Volcker Rule, which previously restricted a bank’s trading and investment activities. The new regulations open the door to banks investing in venture capital funds and ease restrictions around when banks are legally considered owners of funds. 

In an effort to aid big global banks, the updated rules relieve banks of their obligation to set aside cash to safeguard derivatives trades between affiliates within the same firm. The final “softer swap” rule sets a limit on how much inter-affiliate exposure a bank can have without setting aside margin funds of 15% of the firm’s capital. Industry leaders estimate that this could free up as much as $40 billion in previously reserved cash.

According to regulators, the rule change will: 

  1. Facilitate capital formation by providing banks greater flexibility in sponsoring funds that provide loans to companies so banks can allocate resources to a more diverse array of long-term investments.
  2. Protect safety, soundness, and financial stability by not allowing banks to engage in any activity that is not currently permissible if conducted on their balance sheets.
  3.  Provide greater clarity and certainty about what activities are permitted, which will improve the supervision and implementation of the Volcker Rule. 

Those responsible for the Volcker Rule, which includes the Federal Deposit Insurance Corporation, Federal Reserve Board of Governors, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission, are expected to formally approve the changes.