- Federal banking regulators yesterday published their final rule exempting small banks from proprietary trading restrictions enacted after the financial crisis a decade ago.
- The exemption was enacted last year as part of a banking deregulation bill, called the "Economic Growth, Regulatory Relief, and Consumer Protection Act," that separates smaller banks from big, systemically important banks so they don't have to meet several of the controls put in place after the financial crisis.
- Under yesterday's rule, which is unchanged from the proposed version published earlier this year, banks with assets of $10 billion or less and whose trading activities are less than 5% of assets are exempted from the Volcker Rule, which places restrictions on banks' use of deposit funds to make speculative trades on their own accounts, what's known as proprietary trading.
The Volcker Rule is named after former Federal Reserve Board Chairman Paul Volcker, who argued the restriction is needed because of the role proprietary trading played in the financial crisis. "You can't ... combine the special privileges of a bank with unrestricted proprietary activity," Volcker said in a 2010 interview with the Financial Times. "They don't mix."
Small banks argued the Volcker Rule and other restrictions enacted after the financial crisis shouldn't apply to them because their activity didn't contribute to the crisis 10 years ago, they don't pose systemic risk to the economy, and they don't have the resources of the big banks to meet the restrictions and reporting requirements that were enacted after the crisis.
The final rule also permits a hedge fund or private equity fund, under certain circumstances, to share the name or a variation of the name with an investment adviser as long as the adviser is not an insured depository institution, a company that controls an insured depository institution, or a bank holding company.
The five regulators are the Federal Reserve, Commodity Futures Trading Commission, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Securities and Exchange Commission.