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FDIC approves plan to ease Volcker rule compliance

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FDIC approves plan to ease Volcker rule compliance

Federal banking regulators kicked off the approval process for adjustments to a financial crisis-era rule that limits banks' ability to trade with their own money.

The changes will give banks, large and small, more flexibility in complying with the Volcker rule, which prohibits banks from engaging in proprietary trading. Federal regulators and the industry have long said the current framework for applying the rule is too complex.

The Federal Deposit Insurance Corp. approved a rewrite of the rule on Aug. 20, though FDIC board member Martin Gruenberg dissented, warning that it weakens a key pillar of the postcrisis regulatory framework.

Regulators are scrapping their earlier efforts to develop a new "accounting prong," which the banking industry criticized as overly complex. Instead, the final rule will simplify the current "short-term intent prong," which regulators rely on when determining whether certain trades are risky or speculative.

The rewrite also loosens a handful of restrictions for banks investing in hedge funds and private equity funds, but regulators are looking to release a new rule later this year clarifying which funds are restricted.

The rule rewrite divides banks into three tiers based on the amount of trading assets and liabilities the individual institutions hold. The first tier applies to banks with $20 billion or more, which is higher than the $10 billion threshold regulators originally proposed; the second tier applies to banks with assets between $1 billion and $20 billion; and the third tier applies to banks with less than $1 billion.

Banks in the third tier will largely be exempt from the Volcker rule because their trading assets are relatively small. Banks in the top two tiers will need to continue showing their compliance with the Volcker rule, though their compliance requirements will vary depending on their size.

First-tier banks will have to meet the strictest standards, and their CEOs will have to personally certify that their companies are complying with the rule. Second-tier banks will see more modest compliance requirements.

According to the FDIC, the first tier of banks holds about 93% of the trading assets and liabilities in the U.S. banking system. The first and second tiers combined hold about 99% of trading assets.

The rule will go into effect Jan. 1, 2020, but compliance with the new rule will begin Jan. 1, 2021.

The Office of the Comptroller of the Currency joined the FDIC in approving the rule Aug. 20. The three other federal regulators in charge of the Volcker rule ⁠— the Securities and Exchange Commission, the Federal Reserve, and the Commodity Futures Trading Commission — will also have to sign off on the interagency effort in order for it to take effect.

FDIC Chair Jelena McWilliams said in prepared remarks that the new rule provides banks with "more clarity, certainty and objectivity around the Volcker rule, while tailoring the requirements to focus on those banks that conduct the overwhelming majority of trades."

But Gruenberg, the lone Democrat on the board, slammed the overhaul as an attack on the protections put in place by the original Volcker rule. He said the new tweaks allow banks to trade with money insured by U.S. taxpayers.

"The final rule before the FDIC Board today would effectively undo the Volcker rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker rule," Gruenberg said in his dissent.