May 30, 2018 / 9:17 PM / a year ago

Breakingviews - Volcker tweak reveals Powell Fed’s cautious streak

Former U.S. Federal Reserve Chairman Paul Volcker moderates a panel discussion at the Bretton Woods Committee annual meeting at World Bank headquarters in Washington May 21, 2014. REUTERS/Jonathan Ernst

WASHINGTON (Reuters Breakingviews) - The Volcker Rule tweak reveals the cautious streak of the U.S. Federal Reserve under Jerome Powell. Big banks hoping for an overhaul of the proprietary-trading ban will be disappointed by modest revisions that the central bank proposed Wednesday. Compliance costs may fall but Powell’s team, just like its predecessors, doesn’t want Wall Street to go back to its freewheeling ways.

President Donald Trump raised bankers’ hopes by vowing to unshackle their regulatory handcuffs. New faces at U.S. watchdogs added to Wall Street optimism. At the Fed, Trump replaced former governor and industry critic Dan Tarullo with Randal Quarles, like Powell a former Carlyle executive.

But so far, the central bank has largely stayed the course it laid out after the 2008 financial crisis. Before Tarullo stepped down in 2017, he outlined changes he wanted to see in Wall Street rules. They included some minor easing of regulations, particularly for smaller banks. But the largest firms would still face tough requirements.

For example, the Fed decided to retain Tarullo’s idea for a so-called stress capital buffer as part of the annual stress tests. It would likely require the United States’s eight global systemically important banks to hold more capital than smaller rivals.

For the Volcker Rule, the Fed proposed changes that mainly benefit smaller banks with modest or limited trading activities. Those firms would face reduced compliance burdens. All banks would no longer fall under the guilty-until-proven-innocent presumption if they hold an asset for less than 60 days. There are also more exemptions for liquidity management and foreign banks whose trades occur outside the United States.

Overall, Wall Street could see compliance costs fall but many of the restrictions on their trading activities would still apply. The approach echoes Tarullo’s philosophy of tweaking Volcker rather than tearing it up. Suggested changes in other post-crisis rules, such as recalibrating the supplemental leverage ratio or changing the frequency of the living-wills exercise, also largely maintain the status quo.

Even the Republican-controlled Congress this month offered only modest changes to the Dodd-Frank legislation despite Trump’s promise to do a “big number” on the measures. Notwithstanding the regime change at the White House and at the Fed, the central bank rightly retains its distaste for big risk-taking.


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