Markets

Bank stocks surge after regulators ease Volcker Rule, JPMorgan Chase climbs 2%

Key Points
  • U.S. banking regulators are about to ease restrictions created in the aftermath of the Great Recession, a development that sent bank stocks surging. 
  • FDIC officials said they are loosening the restrictions from the Volcker Rule, allowing banks to more easily make large investments into venture capital.
  • The companies will also be able avoid setting aside cash for derivatives trades between different affiliates of the same firm.
  • That could free up billions of dollars for the industry. 
People wait in line outside CHASE bank to use the ATM machine during the coronavirus pandemic on May 29, 2020 in New York City.
Cindy Ord | Getty Images

U.S. banking regulators are about to ease restrictions created in the aftermath of the Great Recession, a development that sent bank stocks surging Thursday.

Federal Deposit Insurance Commission officials said on a call that they are loosening the restrictions from the Volcker Rule, allowing banks to more easily make large investments into venture capital and similar funds.

The banks will also be able avoid setting aside cash for derivatives trades between different units of the same firm, potentially freeing up billions of dollars in capital for the industry.

Shares of big banks including JPMorgan Chase, Goldman Sachs, Wells Fargo and Morgan Stanley were all trading more than 2% higher following the announcement, reversing declines in the premarket. 

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The move is in line with the broad push by the White House to roll back regulations put in place by previous administrations. While the banking industry has acknowledged the benefits of being required to hold more capital to cushion losses, lobbying groups and individuals including JPMorgan CEO Jamie Dimon have criticized parts of the post-financial crisis regulatory regime as being overly restrictive or redundant.

The Volcker Rule is part of the 2010 Dodd-Frank Act, which was passed in an attempt to prevent another financial crisis caused in part by irresponsible risk-taking at banks. The Volcker Rule was designed to prevent banks from acting like hedge funds. The general principle is that they are allowed to facilitate trades for clients, but not allowed to strap on risk for big proprietary bets.

But the rule, named for its proponent, the late Federal Reserve Chairman Paul Volcker,  also barred banks from making potentially speculative investments using customers' FDIC-insured deposits. That included venture capital funds, although lawmakers have said the VC industry may have been unfairly grouped with hedge funds and private equity.

The change, which was floated earlier this year, will allow banks to invest more of their own capital in venture capital funds that invest in start-ups and small businesses alongside clients.

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The FDIC and the Office of the Comptroller of the Currency are set to vote on the rule changes, and the Federal Reserve and Securities and Exchange Commission must also sign off on it. The move to relax margin requirements for swap trades between affiliates of the same company could free up an estimated $40 billion for the industry, Bloomberg reported. That capital could be used to help bolster other parts of the business that are now being squeezed amid the Covid-19 crisis.

Sheila Bair, who chaired the FDIC for a five-year term that included the financial crisis, called the two changes "ill-advised."

"As a former chair of the FDIC, it won't surprise you to hear me say that that $40 billion dollars that will no longer be in banks to protect them against derivatives exposures" will likely increase risk to the government, Bair said Thursday on CNBC's Squawk in the Street. 

Bank stocks have been beaten down since the start of the coronavirus pandemic on fears that record joblessness will result in surging 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 the stage for potential cuts to bank dividends.

"You want excess capital in the system towards the end of a cycle as you're approaching potentially troubled economic times," Bair said. "And now we're giving them a lot of additional capital relief, which we can talk about, at the same time that we're allowing banks to continue to distribute capital in the form of dividends."

—With reporting from CNBC's Wilfred Frost and Kevin Stankiewicz. 

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