Bank investors who braced themselves for the bad news on Thursday got at least one dose of something positive: regulators eased the risk-taking restrictions imposed after the 2008-09 financial crisis.
The Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency and other regulators completed a review of the so-called Volcker rule, imposed under the Dodd-Frank Act of 2010. Their goal was to prevent banks from getting involved in some of the risky behaviors that contributed to the crisis, such as private trade and speculative investments similar to hedge funds.
Among other changes, the move will make it easier for banks to invest in venture capital funds, as well as allow lenders to reduce margin requirements for derivative trading. That could free billions of dollars in capital.
Bank stocks appeared on the news. The KBW Bank Index (ticker: BKX) was up 1.4%. JPMorgan Chase (JPM) shares rose 2%, while Goldman Sachs Group (GS) and Bank of America (BAC) gained 2.7% and 2.3%, respectively.
Thursday’s news was a much-needed injection in the arm for the banking sector and comes at a particularly interesting time. The Federal Reserve is ready to publish the results of its annual stress tests later in the day.
This year’s trial brings more uncertainty than normal, as it will include an overlay to account for the risks to the system caused by the coronavirus pandemic. Investors have been concerned about how the recent economic downturn and low interest rates will affect lenders, as well as whether the Fed test could push banks to cut or suspend their dividends.
Bank stocks have lagged behind the overall market.
The proposed easing of restrictions is another sign of deregulation under the Trump administration. Bankers, unsurprisingly, have long criticized the rules that followed the 2008-2009 financial crisis, citing their complexity and at the same time admitting that some changes were needed in the industry.
The Volcker Rule was enacted to prevent banks from engaging in some of the risky behaviors that contributed to the financial crisis, such as private trade and the making of speculative investments similar to hedge funds.
Heath Tarbert, chairman of the Commodity Futures Trading Commission, spoke in favor of the rule change Thursday, reiterating previous statements. “As I discussed earlier, the Volcker Rule is ‘among the best-intentioned but poorly designed regulations in the history of American finance,'” he said.
Write to Carleton English at [email protected]