(Bloomberg) -- For Wall Street, this week might mark the end of the sweeping period of financial deregulation that has defined the Trump era.
Bank regulators will meet Thursday to wrap up a major revamp of the Volcker Rule and to scrap a constraint that’s forced lenders to set aside ten of billions of dollars to backstop derivatives trades. If President Donald Trump fails to win a second term, the changes will probably be among the last that watchdogs he’s appointed will get done before a new cast of agency heads takes over.
This push “could certainly represent the last wave of Dodd-Frank rollbacks under these regulators,” said Greg Gelzinis, a policy analyst at the Center for American Progress. He notes that while some of the agency leaders could remain in their posts until their terms expire and the Senate confirms successors, a Joe Biden victory in November means they’d be working during a Democratic administration that has dramatically different priorities.
The Volcker Rule revisions that the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency plan to take up this week will ease restrictions on lenders doing business with investment funds, including constraints on banks’ ties to venture capital funds. Last year, regulators already softened the better-known aspect of Volcker that restricts lenders from engaging in proprietary trading -- the practice of making market bets for themselves instead of on behalf of clients.
$40 Billion
Banking agencies are also poised to eliminate a separate requirement that banks hold margin when engaging in derivatives transactions with their own affiliates. Getting rid of the demand could free up an estimated $40 billion across the industry. But critics argue it could mean taxpayer-backed banks will amplify their risks to more dangerous levels.
Agency heads have six months left before the next administration begins. That’s not much time to propose an overhaul of regulations, seek public comment and finalize changes. That’s particularly true if Democrats retake the White House and the Senate because Congress can rescind rules within months of their approval through the Congressional Review Act.
Trump is trailing in polls across the board, nationally and in battleground states, according to the RealClearPolitics average. He had hoped to ride a strong economy to a second term, but the coronavirus and related shutdowns have left tens of millions out of work and the U.S. in recession. However, a New York Times poll released Wednesday showed the economy as the only bright spot for Trump. Half of those surveyed had a positive opinion of how the president is handling it.
Looking back, what bank regulators have accomplished in the past four years isn’t the doomsday scenario that consumer advocates feared after Trump pledged in January 2017 to “do a big number” on the Dodd-Frank Act. Core post-crisis rules remain intact that require banks to hold much more capital to protect against losses and to stockpile liquid assets to ensure they can endure runs. Those cushions have been credited -- by lenders and their overseers -- for keeping the Covid-19 economic turmoil from turning into an even more devastating crisis.
Leash Loosened
Still, the FDIC, OCC, Federal Reserve and other agencies have succeeded bit by bit in loosening Wall Street’s leash under Trump. Rules they’ve relaxed include landmark post-crisis constraints, including the stress tests that assess whether banks can keep lending during economic calamities and living wills -- the detailed plans that are meant to map out a firm’s best route through bankruptcy. And deregulation is far from the only way Trump’s presidency has been good for banks, as the industry has been a big beneficiary of his tax cuts.
Regulators’ procedural missteps delayed work on rules relief that was at the top of Wall Street’s wish list, and agencies spent much of their time relaxing oversight for smaller banks. Rules that remain unfinished include an overhaul of big banks’ leverage limits, a long-awaited liquidity standard, a completion of market-risk controls and constraints on financial executives’ bonuses.
In many ways, the pace of rules-cutting has picked up during the coronavirus pandemic, as regulators moved to head off a severe recession by temporarily relaxing limits on banks’ leverage and other constraints. Wall Street critics worry that lobbyists will make a case for the changes to become permanent.
Sherrod Brown, the top Democrat on the Senate Banking Committee, and Senator Elizabeth Warren, one of banks’ most vocal opponents in Congress, sent a letter to regulators this week demanding that they reverse the decision on leverage, saying it’s “dangerous and puts the economy and hard-working families at risk.”
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