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U.S. regulators propose simpler restrictions around bank fund investments

Published 01/30/2020, 10:41 AM
Updated 01/30/2020, 10:41 AM
© Reuters. us-buFILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington

By Pete Schroeder

WASHINGTON (Reuters) - U.S. banks would be able to take large ownership stakes in venture capital funds under proposed rules unveiled on Thursday by the Federal Reserve.

The potential rewrite would ease restrictions aimed at limiting bank exposure to riskier business investments that were originally ordered as part of the "Volcker Rule."

Banks are already permitted to invest in startups while meeting certain requirements, and agency officials said the rule inadvertently prevented banks from investing in such endeavors through funds.

The overhaul also would simplify other aspects of the so-called "covered funds" portion of the rule. For example, the proposal would exempt funds that foreign banks offer to clients outside the United States from the rule's requirements.

The proposal would also clarify that credit exposures by a bank to a particular fund would not constitute an ownership interest, nor would a bank have a stake in a fund if it happened to make the same direct investments as that fund.

The Volcker Rule was aimed at curbing risky bank activity in the wake of the 2007-2009 financial crisis, but Thursday's proposal marks the second time regulators under the Trump administration have sought to relax those standards in response to industry complaints it is too complex and restrictive.

The Fed shares responsibility for the Volcker Rule with four other agencies: the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Those other agencies are expected to also sign off on the proposal, which could be finalized later this year.

Fed Governor Lael Brainard, a Democrat, opposed Thursday's proposal, arguing in a statement that it would "weaken core protections" established after the crisis.

The proposal comes after regulators eased requirements around another portion of the Volcker Rule in August, which simplified standards around what sort of trading activity by banks is prohibited.

© Reuters. us-buFILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington

The Fed also is set to finalize a rule on Thursday that would create a framework for determining when a company has taken control of a bank and must face more rigorous oversight and restrictions. The rule marks the first time the Fed has laid out a blueprint for when investments made by or in banks is consider controlling, which carries with it additional requirements. Fed officials said that clarity could make it simpler for banks to attract investors or make investments of their own into companies.

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