The Federal Reserve Eases Volcker Rule Regulation

There are big changes coming out of the Federal Reserve for financial institutions. The Federal Reserve will be easing the Volcker Rule in an upcoming decision.

The rule was created almost five years ago as a part of the Dodd-Frank financial regulation law that reduced the risk-taking on Wall Street. A major contributor to the 2008 financial crisis was how financial institutions used customers’ funds in high risk trades. 

The aim of the Volcker Rule was to reduce that kind of behavior and ideally, prevent another financial crisis and bank bailouts funded by taxpayers. 

The Federal Reserve is preparing to ease a rule aimed at defusing the kind of risk-taking on Wall Street that played a role in triggering the 2008 financial meltdown.

The Federal Reserve is instituting a series of changes to the rule in the hope that it will make complying for financial institutions easier and simpler.

The majority of the rule will remain, and continue to stop the trading of depository funds of customers.

Some critics fear the changes will go too far and we’ll end up in a similar situation as 2008. They worry the checks placed on Wall Street for their questionable trading practices will be watered down to the point they are no longer effective or will work as intended.

Regulation of Wall Street is a highly politicized issue, and with Republicans in control of Congress and the White House, these kinds of deregulatory changes will be a talking point for Democrats for the upcoming mid-term elections.

Many voters are still recovering from the losses they suffered in 2008, despite the economic gains of the last few years.

However, it seems the major change is the omission of a word from a part of the Volcker Rule. The removal of the word – “demonstrably” -- from the section is intended to ease the burden on financial institutions to show regulators how their trades act as hedges.

Under the current iteration of the rule, financial institutions can only count complex trades as hedges if they can “reasonably be expected to demonstrably reduce or otherwise significantly mitigate the specific, identifiable risk(s).”

Furthermore, it is expected that the Federal Reserve will allow foreign banks to practice higher risk trades, as long as, that any trading done in the U.S. is in compliance with the Volcker Rule.