Bank Stocks Surge As Regulators Ease Volcker Rule, Morgan Stanley Jumps Over 2%

TOPLINE

Bank stocks surged after federal regulators on Thursday announced they plan to roll back post-financial crisis restrictions, including the Volcker Rule which prevent banks from making large investments into certain funds.

KEY FACTS

The Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC) and Federal Reserve all approved changes to the Volcker Rule on Thursday.

Wall Street banks will now be allowed to boost their investments in venture capital and similar funds, Bloomberg reported.

The OCC and FDIC also scrapped a requirement that lenders hold cash on margin when trading derivatives with different affiliates of the same firm, which will let banks pocket billions of dollars that would otherwise be set aside for derivatives trades. 

The reversal of the margin requirement for swaps trades could potentially free up an estimated $40 billion for Wall Street banks, according to Bloomberg, though the Federal Reserve still needs to sign off on the move.

Shares of major banks soared on the news, leading the market to cut its losses from disappointing unemployment data and turn positive on Thursday morning.

JPMorgan and Morgan Stanley saw their stocks rise more than 2%, while Citigroup and Bank of America are both up over 1.5%.

Key background

The Volcker Rule was originally established as part of the 2010 Dodd-Frank Act, with the aim of preventing banks from acting like hedge funds and taking irresponsible risks with their investments. The latest moves are in line with the Trump administration’s broad efforts to roll back financial regulations implemented in the wake of the 2008 financial crisis. The revisions have in some cases been referred to as Volcker 2.0, adding more leniency to one of the most controversial pieces of regulation in the Dodd-Frank Act. Many lobbying groups and individual CEOs—including JPMorgan Chase’s Jamie Dimon—in the banking industry have criticized the current regulations for being overly restrictive. 

Chief critic

Former FDIC Chair Sheila Bar, who served from 2006 to 2011, publicly criticized the changes to bank regulations on Thursday. “These two specific proposals, I think, are ill-advised,” she told CNBC. She warned that giving banks more leeway by amending the Volcker Rule is “not a good idea,” and that “we went down that road” before the financial crisis.

Further reading

Stocks Turn Positive After Bank Regulators Ease Volcker Rule (Forbes)

IMF Slashes Global GDP Forecasts, Warning Of An Economic Crisis ‘Like No Other’ (Forbes)

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