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Regulation

Volcker Rule rewrite said to start as Trump regulators grab reins

Treasury Secretary Steven Mnuchin has called for 'significant changes' to the Volcker Rule, written in response to the 2008 financial crisis.

Wall Street regulators have agreed to rewrite the Volcker rule, according to three people familiar with the matter, moving to loosen industry-despised restrictions that were central to the U.S. response to the financial crisis.

The five agencies that wrote the original limits on banks investing with their own capital have decided to begin working together on a revision, said the people, who requested anonymity because the discussions aren't public. The changes discussed July 28 at a closed-door meeting will likely give big banks more flexibility for handling client trades, as well as investments in private equity and hedge funds.

The planned rewrite of Volcker highlights the administration's efforts to use agencies to roll back regulations without having to go through a Congress that has failed to advance many of President Donald Trump's other priorities. Regulators aligned with Mr. Trump have indicated they'll be guided by Treasury Secretary Steven Mnuchin's June report calling for "significant changes" to the rule, which was designed to rein in risky trading after the financial crisis.

The agencies can revise the 2013 rule's text, but unless it is repealed, there's only so much that can be done to answer years of lobbying by financial titans including Goldman Sachs Group (GS) and J.P. Morgan Chase.

While the agencies agreed to start editing the rule during a meeting of the Financial Stability Oversight Council — a panel of regulators led by the Treasury secretary — at least one of them is also looking to gather outside input. The Office of the Comptroller of the Currency is poised to request public comments on Volcker, according to Keith Noreika, who is running the agency on a temporary basis.

Mr. Trump's election and appointment of bank-friendly regulators raised hope in the industry that the rule would be changed, and the president's lieutenants have signaled their intent to do so. Mr. Mnuchin told lawmakers last week that Treasury was working with regulators to clarify the rule. He also told them that he wouldn't object to Congress repealing Volcker, but that his department was focused on how to fix it.

"We had a thorough and constructive dialogue on the Volcker Rule last week," Mr. Mnuchin said in an emailed statement after being asked about the July 28 agreement. "During the discussion, the FSOC member agencies shared many good ideas on how the Volcker rule could be improved. I look forward to continuing to work with our banking and market regulators on modifying the rule." Spokesmen with the five regulators declined to comment.

The rule, named for former Federal Reserve Chairman Paul Volcker, an early champion of the concept, has been controversial from the start. It was meant to prevent lenders with federal deposit insurance from making big market bets that could lead to outsize losses. Proponents argue that the restrictions have made markets safer and say that banks still make billions on trading. Critics say it has made banks too conservative, prompting a retrenchment from certain markets that has dried up liquidity.

Wall Street's most frequent complaint is that Volcker is unclear in what it bans, so the banks are forced to stay far away from the edges of what's allowed.

The Treasury report called for exempting banks with less than $10 billion in assets from the rule completely and giving all lenders more leeway to trade. Restrictions on banks' investing in private equity and hedge funds should be loosened, Treasury argued at the time.

Regulators are hoping to finish a proposal by the end of the year, one of the people said. Still, revising it could take years and will face the administrative processes at each of the five agencies: the Federal Reserve, Securities and Exchange Commission, Federal Deposit Insurance Corp., Commodity Futures Trading Commission and OCC. The original rule took more than three years to finish, and a replacement would need to go through a formal joint proposal before all five regulators could finalize it.