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In late 2020, the Federal Reserve picked up where the FDIC
left off and altered part of the Volker rule which was put in place during the
great financial crisis of 2008. The change in the ruling effects the way banks
must hold reserves if they want to invest their own money in the market. During
the financial crisis, banks lost billions of dollars on high leverage bets on
the US housing market. In the wake of the crisis, new laws were put in place
along with regulations that halted proprietary trading by banks. The consumer
led bailout of the banks led to tight regulation which was in place for more
than a decade and have finally seen some relief.
Tweak to a Ruling
In mid-2019 the Federal Deposit Insurance Corp (FDIC)
approve a revision
of the Volcker Rule. This change helps to clarify the way banks trade
securities using their own funds known as proprietary trading. Proprietary
trading differs from the trading that a bank does for its clients. Ahead of the
change made by the FDIC, the Officer of the Controller of the Currency also
approved the rule change.
In late October of 2019, the Federal Reserve announced that
the change in the rule would take effect on January 1, 2020. Their announcement
was a change to the Volcker rule which prohibits banking entities from engaging
in proprietary trading. Community banks will remain exempt from the Volcker
rule by statute.
The new rule was jointly developed by the Federal
Reserve Board, the Commodity Futures Trading Commission, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the Currency,
and the Securities and Exchange Commission.
How Will This Alter Proprietary Trading?
The upshot is that banks that trade actively will have more
restrictions but will be able to engage in trading of its own funds. This will
provide an additional revenue stream for banks that want to engage in this
practice. While regulators will have more to watch, their focus wil… Read More
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