Two Big Breaks for the Big Banks to Kick Off 2015
Policy + Politics

Two Big Breaks for the Big Banks to Kick Off 2015

Christmas parties at some of the nation’s biggest banks may be a little more cheerful this year, as lawmakers and regulators combined to deliver two big gifts to the financial services industry in the final weeks of the year. 

Already celebrating the roll-back of certain elements of the Dodd-Frank Act that limited their ability to trade swaps and derivatives, bankers got the news Thursday that regulators planned to extend the compliance deadline for part of the Volcker rule, another element of Dodd-Frank, by two years. 

Related: CRomnibus Swaps Provisions: Some Real Problems, Some Imaginary Ones 

The Volcker rule is the part of the Wall Street reform law, passed in the aftermath of the financial crisis that was meant to bar banks from proprietary trading of securities (meaning trades executed on behalf of the bank in expectation of profit, rather than as a service to a client or a hedge against risk.) It also blocked investing in most hedge funds and private equity funds, and required banks holding such investments to begin unloading them. 

It’s those “legacy” funds still in bank portfolios that are most affected by the announcement Thursday by federal bank and securities regulators. The proprietary trading ban will still go into effect next summer. 

The American Bankers Association trumpeted the Volcker rule delay as a major victory for the industry. 

“We are grateful that the Federal Reserve will give banks of all sizes the time they need to comply with the rule, thus minimizing potential disruption from hastily unwinding these funds,” said ABA President and CEO Frank Keating. “We especially appreciate that it applies to all legacy funds, as many banks are still determining exactly what is covered as they seek to comply.” 

Related: Yellen Will Fight to Keep the Fed Independent from Politics 

The regulators’ decision comes less than a week after both houses of Congress approved a spending bill that removes another restriction that Dodd-Frank had placed on banks insured by the Federal Deposit Insurance Corp. The law required banks to “push-out” certain kinds of swaps and derivatives holdings, such as credit default swaps that had not been cleared through a major clearinghouse, and commodity and equity derivatives. 

The idea behind the law was to minimize the risk to the Federal Deposit Insurance Corp. presented by insured banks holding large portfolios of potentially volatile financial instruments. And when Congress debated the measure, many members argued that removing the push-out provision was setting up taxpayers for another bank bailout. 

"A vote for this bill is a vote for taxpayer bailouts of Wall Street," said Massachusetts Sen. Elizabeth Warren. 

Related: 4 Issues That Could Derail Jeb Bush’s 2016 Hopes 

Warren, a liberal Democrat who fought for the creation of the Consumer Financial Protection Bureau, has consistently challenged big U.S. banks arguing, among other things, that Citigroup is so big that it ought to be split up. She was adamantly against the removal of the push-out provision. 

“This Congress can’t be here to say what can we do to improve the profitability of a half-dozen large institutions and shove all the risk off to the American people again,” she said last week. “This Congress has to stand for a little more safety and security in our financial system.” 

Despite the protestations of Warren and other lawmakers in favor of tighter regulation of large banks, the bill is headed to President Obama’s desk and will likely be signed into law. 

Top Reads from The Fiscal Times