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US banks cleared to invest in venture capital and loan funds

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Via Financial Times

US banking regulators have issued new proposals that would weaken the Volcker rule, the post-crisis rule designed to limit risky trading on Wall Street, so that banks would be allowed to take stakes in venture capital and loan funds.

The amendment would limit the scope of the rule’s “covered funds” provisions, which banned banks from investing in hedge funds or private equity funds.

The amended rule would allow investments in funds that own bonds and loans, provided that banks were already permitted to own those assets directly. Banks would also be permitted to contribute a small amount of cash or securities to loan securitisation funds in order to provide liquidity.

Venture capital investments would no longer be covered by the rule at all.

Securities and Exchange Commission chairman Jay Clayton said that enacting the amendments could “facilitate capital formation, improve competition and market efficiency along a number of dimensions, and do so without increasing risks to investors.”

Restrictions on funds owned by foreign banks, and on banks providing credit to wealth management vehicles and family offices would also be lightened. Investing in hedge funds or private equity funds would remain off-limits.

The proposed changes “are largely as expected — many of the issues raised by industry groups have been addressed, consistent with the spirit of last year’s amendments to the proprietary trading rules,” said Jai Massari, a lawyer specialising in financial regulation at Davis Polk.

Last year, regulators eased the rules restricting banks’ own trading, eliminating the presumption that any position help for less than 60 days constituted proprietary trading, and adding a presumption that any position held longer than that period does not. Regulators also lightened the regulatory burdens of smaller banks under the Dodd-Frank reforms.

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The Volcker rule was so-called because it was advocated by the former Federal Reserve chairman Paul Volcker, who died last year.

Consumer advocates expressed concern that the latest amendments would permit risky behaviour by banks. “Today’s proposal undermines the Volcker rule prohibition and its objectives by opening more loopholes that will allow Wall Street’s biggest taxpayer-backed banks to again engage in substantial proprietary trading,” said Dennis Kelleher, chief executive of Better Markets, a lobby group.

The amendments were developed jointly by five major US financial regulators: the SEC, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Commodity Futures Trading Commission.

There will be a public comment period on the proposal stretching into April, after which regulators will consider final approval.

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