Today, five regulators finalized changes to the Volcker Rule dramatically weakening limits on bank investments in hedge funds, private equity funds, and other “external funds”. The vote was partisan, with not a single Democratic appointee voting for the change. Today’s move completes the process of gutting this critical part of the Dodd-Frank Act, which was begun last year when regulators eliminated key controls on bank proprietary trading.
As AFR has documented, the Volcker Rule was created in direct response to the experience of the 2008 financial crisis, in which banks multiplied risks and losses through hedge-fund like proprietary trading and relationships with external funds like hedge funds and mortgage securitizations. Regulatory implementation of these mandated restrictions on irresponsible risk taking and self-dealing has always been inadequate. Now the Trump Administration has fatally weakened the final controls in place on these dangerous behaviors.
The rush to tear down the remaining Volcker Rule controls during the pandemic crisis is particularly irresponsible and dangerous. By freeing banks to increase their relationships with hedge funds, credit funds, and securitization vehicles during a period of extreme market volatility and uncertainty, regulators are giving the green light for critical financial institutions to increase risks and reduce transparency and accountability at a time of unprecedented economic fragility.
Banking regulators also finalized rules on inter-affiliate swaps that permit large global banks to reduce risk protections when trading in derivatives with their foreign subsidiaries – a direct tradeoff of higher bank profits for lower risk controls.
Even during the current economic crisis the Trump Administration is putting a priority on actions that boost Wall Street profits at the cost of greater risk and economic danger for the rest of us.