The Finance 202: Big banks had a good day in Washington

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Finance America

Mark it a banner day in Washington for the big banks. On Thursday morning, an A-team of regulators lined up before the Senate Banking Committee and largely agreed to dial back restrictions imposed on the industry after the financial crisis. And in the afternoon, the largest financial institutions all passed the first round of the annual stress tests administered by the Federal Reserve, supplying a fresh argument for Republicans angling to ease up on Wall Street.

The back-and-forth at the Senate hearing revealed what appears to be an emerging consensus among those in power about where the industry’s cops on the beat can relax enforcement. Led by Fed governor Jerome Powell, the regulators singled out the Volcker Rule, which prohibits banks from making certain kinds of risky investments for their own gain, as ready for a trim. Powell argued the other safety measures built into the law — namely its capital and liquidity requirements and the stress tests — reduce the urgency of Volcker’s ban on proprietary trading.

“It gives a little more freedom to think about how we can draw back the scope of Volcker and make it less burdensome,” he said. Further, Powell said, those implementing the rule went “well beyond what’s in the statute.” He said the Fed would likely support a “significant tailoring” of Volcker so it would apply only to those banks with big trading books. And he said regulators could redefine what qualifies as a trading account.

Strikingly, Powell got an amen from the only moderate Democrat on the panel who showed up for the hearing, Sen. Heidi Heitkamp of North Dakota. “Many current and former regulators publicly state the Volcker Rule is way too complicated,” she said. “It’s my experience when a rule is too complicated, there isn’t much compliance, so it doesn’t really get you what you need.” Add that to Sen. Jon Tester (D-Mont.) — also on the banking committee and up for reelection next year in a red state — told me Wednesday that he’s keeping an open mind on Volcker changes, and you’ve got a germ of bipartisan agreement for rolling back the rule.

But Powell and company don’t need new legal authority to relent from applying it. The Treasury report last week that presented the Trump administration’s plan for weakening the 2010 Dodd-Frank Act also spelled out which recommendations could be carried out by regulators alone. Nine of the 17 Volcker tweaks the report suggests wouldn’t require anything from Congress.

The good news for banks kept coming. All 34 banks that had to submit so-called capital plans to the Fed for their annual stress tests — another Dodd-Frank legacy — cleared the first hurdle of that process. The second one comes next week and will include a determination about whether the banks can proceed with payouts to investors. The entire exercise is meant to regularly check the health of banks by running the numbers on how they’d fare in the event of another economic crisis.

The banks have complained about the compliance burden imposed by the tests. Now, regulators and policymakers are mulling whether to tweak their scope and frequency as part of the deregulatory push. Powell testified Thursday that as banks get stronger, regulators should look to exempt smaller institutions from the requirement altogether and pare it back for others.

“As we consider the progress that has been achieved in improving the resiliency and resolvability of our banking industry, it is important for us to look for ways to reduce unnecessary burden,” he said in his prepared testimony. The banks couldn’t have said it better themselves.

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Source: The Washington Post

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