Regulators Ease Restrictions On Volcker Rule

Unsplash/Dmitry Demidko

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“This can’t get worse” – Everyone

“Hold my beer.” – the FDIC

Regulators for the FDIC announced that is removing some of the restrictions from the Volcker Rule allowing banks to make investments in venture capital again.

The Rule was originally implemented as part of the Dodd-Frank Act in 2010 and requires banks to have large cash reserves and prevents them from making speculative trades using customers’ deposits. Cmon, like that would ever happen…

Easing the restrictions will free up an estimated $40B in the banking industry and allow banks to reallocate some of the cash it’s required to hold as margin exposure (read: an oh sh*t fund) to some of the areas impacted by COVID-19. But it’s not the wild west, the specific rule only relates to over-the-counter swap transactions between the banks and their affiliates.

So, what could go wrong? 

According to the markets, nothing. Markets surged late in the day on the news, with all indices finishing up over 1%. JP Morgan rose 2% as the news means banks can look for higher profits with their new capital.

But former head of the FDIC Sheila Bair isn’t so sure this is a good thing. According to Bair, the move allows banks to take risks with no consequences. See, big banks know that if the going gets rough, ol’ Uncle Sam will bail them out. Who do banks think they are, the airlines?! 

The bottom line…

Luckily, the FDIC isn’t the only one in charge around here. While the FDIC was easing restrictions yesterday, the Fed was busy adding new ones. Classic government solidarity.

Jer-bear and the boys performed their annual stress test on the banking industry and said the banks’ balance sheets are “healthy” but not in the best of shape due to the coronavirus pandemic. Same, banks, same.

For the first time in history, banks will also have to resubmit their payout plans and go through the process again at least once more by year-end. In the near-term, big banks will be required to suspend share buybacks and put a cap on dividend payments for the third quarter this year.

Stocks for the sector dropped after-hours trading.

Water Cooler Talking Point(s)

💧 “If the banks would reallocate some funds to my bank account, that’d be tight.” (Ian, The Water Coolest HQ)


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The Water Coolest is a daily business newsletter consisting of business news, financial advice, and unfiltered commentary. Delivered fresh in your inbox every morning so you're ready to snap necks and cash checks. Written by Tyler Morrin, AJ Glagolev, Nick Ellis, and Ian Barto.