Many banks and brokerage houses were using their own company’s money to invest in derivatives, such as mortgage-backed securities and other complex financial instruments.
The eventual collapse of the subprime mortgage market (loans to borrowers with poor credit histories) created a ripple effect that led to the collapse of Bear Stearns, Lehman Brothers, Washington Mutual, and many other companies.
Giant banks ended up needing to receive hundreds of billions of dollars in federal bailout money to stop the bleeding.
Regulators said the changes will allow banks “to allocate resources to a more diverse range of long-term investments in a broader range of geographic areas, industries and sectors that they can directly access.”
The new rules are estimated to potentially free up to $ 40 billion for large banks.
It is also the latest example of how regulators in the Trump administration are undoing much of the Obama-era rules set to curb bad behavior by big banks.
The FDIC, the Fed and other agencies have already neutralized the part of the Volcker rule that restricted so-called bank-owned trading, the practice of investing in the company’s own funds rather than gambling for customers.
The bankers applauded the changes.
“We welcome the measured steps taken today by the FDIC, which will allow banks to further support the economy at this challenging time for the nation,” said Rob Nichols, president and CEO of the American Bankers Association in a statement.
“The FDIC and other bank regulators have unnecessarily increased the risks to the US banking system. And they have jeopardized the savings of all Americans with money deposited in the largest Wall Street FDIC-insured banks that are involved. in global derivatives trading, “said Joseph Cisewski, senior derivatives and advisory consultant with Better Markets, a nonprofit group.
The new rules come just hours before the Fed releases the results of the so-called stress tests for the big banks, a kind of report card that has been in place since the financial crisis.
CNN Business’s Matt Egan, Anneken Tappe and Jeanne Sahadi contributed to this story.