Regulators Easing the Restrictions on Banks Set in the Aftermath of Great Recession


The shares of big banks declined after the Fed said it would put a temporary cap on their dividend payments to preserve cash during the coronavirus pandemic.

In its stress test, the central bank found that most banks would remain well capitalized in an economic downturn, but it also sees that large financial institutions remain vulnerable to it.

The Fed also suspended bank’s share buybacks through the third quarter, following eight big bank’s pledge early this year to halt buyback programs through this month. Fed Governor Lael Brainard, who argued that these restrictions weren't strict enough said,

“Using backward-looking earnings as the basis for payouts in a forward-looking capital framework is problematic at a time when future earnings are likely to decline, and required buffers are likely to rise.”

Regulators also gave breaks, capital-requirement relief, to large global banks to make it easier to lend and operate in financial markets.

Let’s risk customers' deposits

In contrast, the US banking regulators are easing the restrictions that were created in the aftermath of the Great Recession.

On Thursday, the bank stocks, including that of Goldman Sachs, Wells Fargo, Morgan Stanley, and JPMorgan Chase, jumped after Federal Deposit Insurance commission officials said they are loosening the restrictions from the Volcker Rule.

This will allow banks to make significant investments, not only their own but also of their clients, into venture capital funds that invest in start-ups and small businesses more efficiently.

Such a decision allows banks to free up billions of dollars by avoiding setting aside cash for derivatives trades between different units of the same firm.

The White House has long been pushing to roll back the regulations imposed by previous administrations. The Volcker Rule, part of the 2010 Dodd-Frank Act was passed to prevent another financial crisis caused in part by the irresponsible risk taken by the banks and from acting like hedge funds.

Late Federal Reserve Chairman Paul Volcker also barred banks from making speculative investments using customers' FDIC-insured deposits, including venture capital funds.

While the banking industry acknowledged the benefits of keeping more capital to cushion the losses, the likes of JPMorgan CEO Jamie Dimon and lobbying groups have criticized them as being overly restrictive.

The Office of the Comptroller of the Currency and FDIC are to vote on the rule change, which must be signed by the Fed and SEC.

The good thing is more millennials are now trusting bitcoin over these big banks. A recent survey found 47% of the respondents in 2020, up from 29% in 2017, are preferring the world’s leading digital currency.

This growing confidence in BTC is the result of an “increase in public confidence towards BTC as an asset class” amidst the central banks printing money incessantly during the pandemic.

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