U.S. could ease Volcker Rule, exempt small banks: regulators

WASHINGTON (Reuters) - U.S. financial regulators could ease rules that keep taxpayer-backed banks out of some risky investments, according to testimony released on Wednesday ahead of a Senate hearing.

Federal Reserve Governor Jerome Powell attends the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015. REUTERS/Jonathan Crosby

Officials from the Federal Reserve and the Office of the Comptroller of the Currency (OCC) said they were looking at ways to simplify the Volcker rule, which prevents banks from making speculative bets with their own money. The possible steps included exempting small banks from having to comply with it.

“In our view, there is room for eliminating or relaxing aspects of the implementing regulation,” Fed Governor Jerome Powell said in testimony to be given before the Senate Banking Committee on Thursday.

“The Volcker Rule provides a practical example of how conflicting messages and inconsistent interpretation can exacerbate (the) regulatory burden,” said Keith Noreika, the acting Comptroller of the Currency, a leading regulator for national banks.

The Fed and the comptroller’s office are among five bank regulators that must agree to any reform of the Volcker Rule, part of the Dodd-Frank law that passed in the wake of the 2008 financial crisis. The Volcker rule also limits relationships between covered banks and hedge funds or private equity funds.

Wall Street and some regulators have said the standard is too constricting, leaving banks vainly trying to separate accounts that may not actually take risky bets and sapping liquidity in some markets because bank dealers are put off from participating.

Backers of the rule say it guards against speculation that could lead to another costly government bank bailout.

The Federal Reserve wrote much of the regulatory language spelling out the Volcker Rule, and the central bank now thinks there is a way to improve the standard, Fed Governor Jerome Powell said.

Noreika and Powell are among a handful of national regulators due to testify about regulatory reform on the banking panel. They said they could envision smaller banks being exempted from the Volcker Rule, named after former Fed Chairman Paul Volcker who led the central bank in the 1980s.

President Donald Trump has favored less restrictive banking rules to boost lending and spur economic growth. But Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), which insures bank assets, warned it could be risky to loosen the rules too much.

“It is important to preserve the gains that have been achieved in restoring financial stability,” Gruenberg was due to tell the banking panel.

Gruenberg’s term ends in November. Trump has said he intends to nominate James Clinger, a Republican Congressional staffer, to replace Gruenberg.

Reporting By Patrick Rucker and Jason Lange; Editing by Chizu Nomiyama and David Gregorio