The move is the latest effort by the government to loosen such restraints on banks. President Donald Trump has blamed Dodd-Frank for constraining economic growth. The Fed is meeting Wednesday to propose changes the Volcker Rule changes.
The rule is named for Paul Volcker, a Fed chairman in the 1980s who was an adviser to President Barack Obama during the financial crisis. Volcker urged a ban on high-risk trading by big banks to diminish the likelihood that taxpayers might have to rescue them, as they did with hundreds of billions after the meltdown.
The Fed action comes amid a volley of recent moves unwinding the stricter regulations that took effect after the 2008 crisis and Great Recession: —Last week, Congress approved legislation rolling back the Dodd-Frank law, giving Trump a key win on a campaign promise as he quickly signed it into law. The Republican-led legislation, passed with help from some Democrats' votes, was aimed at especially helping small and medium-sized banks, including community banks and credit unions. It eases oversight and capital requirements (and Volcker Rule compliance) for about two dozen banks falling below a new threshold, including BB&T Corp., SunTrust Banks, Fifth Third Bancorp and American Express.
—After Trump installed him in November as acting director of the Consumer Financial Protection Bureau, Mick Mulvaney has reshaped the watchdog agency established by the Dodd-Frank law and urged a curb on its powers. He has dropped a lawsuit against a payday lender, targeted agency enforcement powers in anti-discrimination cases and threatened a consumer complaint database. No banks or other financial institutions have been fined or sued since he took over.
The scope of the Fed's proposed revisions to the Volcker Rule is still unclear. The burden could shift from the banks to the regulators to prove that specific types of transactions violate the ban. The Volcker Rule banned high-risk activity known as proprietary trading. The practice had become a huge money-making machine for Wall Street mega-banks, like Goldman Sachs, JPMorgan Chase and Morgan Stanley. Proprietary trading allowed big banks to tap depositors' money in federally-insured bank accounts — essentially borrowing against that money and using it for investments.
"Weakening the Volcker Rule means allowing banks to play with other people's money again. That was the casino economy before the crisis," says Ed Mierzwinski, a senior director at the U.S. Public Interest Research Group, a consumer advocacy organization
In the years since the rule took effect, banks have been required to trade mainly on their clients' behalf. "The proprietary trading desks are gone (from the banks) and they're probably not going to come back," says Oliver Ireland, an attorney specializing in banking law at Morrison & Foerster who was an associate general counsel at the Fed.
Still, big Wall Street banks have pushed against the Volcker Rule. It can be hard to identify what is proprietary trading as opposed to other key bank activities such as market-making, which is exempt from the ban on proprietary trading. When big banks engage in market-making, they use their own money to take the opposite side of a customer's trade: They buy or sell an investment to help execute the trade.
The Fed is an independent regulator that asserts its separation from political pressure and the White House. Trump, of course, has had the opportunity to put his stamp on the central bank by filling positions on the seven-member Fed board.
The new Fed chairman since February, Jerome Powell, who was a board member under ex-Fed chair Janet Yellen, was an investment banker before he joined the central bank. After Trump tapped him as Fed chief, Powell told Congress he believes the rules put in after the 2008 crisis could be improved, though he doesn't completely support the administration's blueprint for deeply cutting into regulations.
Another Trump appointee on the Fed board, investment banker Randal Quarles, is the Fed's top overseer of Wall Street and the leader in the move to ease financial regulation. He has said the package of rules under Dodd-Frank should be overhauled but not scrapped. The third sitting Fed governor is Lael Brainard, a former Treasury Department official appointed by Obama in 2014.
Trump has named three others to fill vacancies on the board: two economics professors and the Kansas banking commissioner. They are awaiting Senate confirmation.