Volcker Rule: Trump to roll back post-crisis banking regulations

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  • President Donald Trump and his administration are
    expected to scale back provisions of the Volcker Rule, which is
    designed to combat exorbitant risk-taking by banks.
  • Those financial-system excesses were largely blamed for
    the financial crisis a decade ago.
  • Banks were among the market’s biggest gainers
    immediately after Trump’s election victory amid expectations of
    less oversight.

Bank stocks surged following Donald Trump‘s election victory amid
expectations of reduced regulation. Now it looks like the
president is ready to follow through.

Backed by the Federal Reserve and assorted
regulatory agencies, the Trump administration is planning to
propose an overhaul to the so-called Volcker Rule, which was intended
to clamp down on the excessive risk-taking by banks that many
blame for the financial crisis.

Originally part of the 2010 Dodd-Frank Act, and named after
former Fed Chairman Paul Volcker, the rule has long held a
provision stating that positions held by banks for less than 60
days are considered speculative, and therefore not allowed.

Trump is instead proposing that banks be the ones to decide
whether they’re complying, essentially making regulators
responsible for challenging them, according to a Bloomberg report. The end
result is expected to be a much less restrained trading
environment on Wall Street — precisely the type of conditions
that allowed risk-taking to spiral so out of control ahead of the
last market crash.

To better understand what exactly is going on here, consider
that, in the mind of regulators, banks should be trading
predominantly on behalf of their clients, rather than for
themselves.

This is a practice called “market making,” and the difference
between that and so-called proprietary trading — which regulators
think is done more with self-interest in mind — has been defined
by the duration of the trade. And regulators apparently decided
on 60 days as the line of demarcation.

According to Bloomberg’s report, regulators
are also trying to make it easier for banks to stock-pile assets
for short-term client purchases, while also loosening compliance
requirements for small lenders. 

In the end, the looming spectre of less regulation has skeptics
worried about banks once again incurring too much risk for their
own good. And while that’s a sound argument, it’s also worth
considering that both banks and regulators have learned from
their past mistakes, and are wise to the risks of overindulging.

Regardless of how it shakes out, bank stocks are the clear
beneficiary in the situation. Already up 48% since Trump’s
election,t he KBW Bank Index is positioned to benefit from the
double whammy of less oversight and higher interest rates.