Banking stocks are in the headlines Thursday as U.S. banking regulators are preparing to mitigate limitations created in the aftermath of the Great Recession, which drove bank stocks and ETFs higher Thursday, with markets still languishing after an overnight selloff following losses Wednesday.
FDIC officials explained on a call that they are easing the restrictions from the Volcker Rule, permitting banks to more invest in venture capital and similar funds as well as avoid hoarding cash for derivatives trades between different units of the same firm, possibly releasing billions of dollars in capital for the industry.
The news drove up the prices of JPMorgan, Goldman Sachs, Wells Fargo and Morgan Stanley stocks, which were all trading over 2% higher following the announcement, recovering from a selloff in the overnight session.
The iShares Dow Jones US Reg Banks Ind. ETF (IAT) gained 1.72% amid the news, while the Vanguard Financials ETF (VFH) added 1.43%, and the SPDR S&P Bank ETF (KBE) gained 1.31%.
The Volcker Rule is part of the 2010 Dodd-Frank Act, a measure put in place to stymie another financial crisis caused in part by foolish risk-taking at financial institutions. It was essentially created to prevent banks from trading like hedge funds, not permitting them to push risk and make large proprietary bets.
Named after the late Federal Reserve Chairman Paul Volcker, the rule also blocked banks from making potentially speculative investments using customers’ FDIC-insured deposits, which are supposedly guaranteed. The rule included venture capital funds as well as banks, although lawmakers have said the VC industry should not necessarily have been lumped in with hedge funds and private equity.
The FDIC and the Office of the Comptroller of the Currency are scheduled to vote on the rule changes, and the Federal Reserve and Securities and Exchange Commission must also sign off on it, providing capital that could potentially be deployed to help shore up other parts of the business that are now being pressured amid the coronavirus pandemic.
Bank stocks have been suffering since the commencement of the coronavirus pandemic as a result of worries that historic joblessness could promote skyrocketing defaults on loans. The industry is also set to get the initial results from the Fed’s annual stress test on Thursday, which could set up potential cuts to bank dividends given that funds are needed.
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