Bank investors bracing for bad news Thursday got at least a dose of something positive: Regulators eased up restrictions on risk-taking put forth following the financial crisis of 2008-09.
The Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency and other regulators finalized an overhaul of the so-called Volcker rule, imposed under the 2010 Dodd-Frank Act. It was meant to prevent banks from engaging in some of the risky behavior that contributed to the crisis, such as proprietary trading and making speculative, hedge fund-like investments.
Among other changes, the move will let banks invest more easily in venture-capital funds, as well as allowing lenders to reduce margin requirements for derivatives trades. That could potentially free up billions of dollars in capital.
Bank stocks popped on the news. The KBW Bank Index (ticker: BKX) climbed 1.4%. Shares of JPMorgan Chase (JPM) were up 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 shot in the arm for the banking sector and comes at a particularly interesting time. The Federal Reserve is set to release the results of its annual stress tests later in the day.
This year’s test brings more uncertainty than normal as it will include an overlay to account for risks in the system caused by the coronavirus pandemic. Investors have fretted over how the recent economic downturn and low interest rates will affect lenders, as well as whether the Fed’s test could push banks to cut or suspend their dividends.
Bank shares have lagged behind the broader market.
The proposed easing of restrictions is another sign of deregulation under the Trump administration. Bankers, unsurprisingly, have long been critical of the rules that followed the 2008-2009 financial crisis, citing their complexity while also conceding that some changes to the industry were needed.
The Volcker Rule was enacted to prevent banks from engaging in some of the risky behavior that contributed to the financial crisis, such as proprietary trading and making speculative, hedge fund-like investments.
Heath Tarbert, chairman of the Commodities Futures Trading Commission, spoke in favor of the rule change Thursday, reiterating previous statements. “As I have previously remarked, the Volcker Rule is ‘among the most well-intentioned but poorly designed regulations in the history of American finance,’” he said.