U.S. banks can take huge stakes in enterprise capital funds under a proposal to ease strict bank trading and investment guidelines introduced following the 2007-2009 international financial crisis, regulators stated on Thursday.
The proposed changes type part of a broader shake-up of the so-called “Volcker Rule” long-hated by banks that was rolled out by the U.S. Federal Reserve in May 2018.
The first phase noticed regulators ease the rule’s trading restrictions, and Thursday regulators moved to simplify the so-called “cover funds” facet of the rule that constrain bank investments in a range of funds.
One of Thursday’s crucial modifications intends to repair what officials said was an unintentional outcome of the original rule.
It constrains banks from investing in funds that, in turn, put money into venture capital, although banks can still make investments immediately by buying stakes in startups.
The proposal would also clarify that credit exposures by a bank to a specific fund wouldn’t represent an ownership interest, nor would a bank have a stake in a fund if it happened to make the same direct investments.
The Volcker Rule was brought by the 2010 Dodd-Frank Act to ban banks that accept taxpayer-insured deposits from engaging in short-interval speculative trading and risky investments.
The Fed shares responsibility for the Volcker Rule with four different companies, which have all supported the proposal that could be finalized later this year.
Fed Governor Lael Brainard, a Democrat, opposed Thursday’s offer, arguing that it might “weaken core protections” formed after the crisis.
The Fed finalized a rule Thursday that may build a framework for determining when an organization has taken control of a bank and should face more rigorous oversight and constraints.