Volcker Rule Revision Inspires Hope For Startups, But Also Stirs Debate

The FDIC’s decision to ease the Volcker Rule could prove to be a boon for some startups, freeing up banks to invest tens of billions of dollars in high-risk venture capital funds that specialize in fast-growing fledgling companies.

Bank stocks surged on the news, which will free financial institutions (FIs) to pump as much as $40 billion into venture capital funds, a move that supporters say will boost growth among small businesses and startups and create badly needed jobs.

As part of the changes, banks will also no longer be required to stash away cash to support derivatives trades that involve different divisions or units under the same corporate umbrella.

But the easing of the Volcker Rule has also raised concerns among some critics, including an FDIC board member, that the move could potentially weaken the financial system at a crucial time.

Named after the late Paul Volcker, the former Fed chief who championed it, the rule was imposed by federal regulators after the Great Recession in the wake of catastrophic losses by some banks that made overly risky investments.

The FDIC indicated in a statement on Twitter Thursday (June 25) that its board of directors had “modified” the “so-called ‘Volcker Rule’ to improve access to capital for startups and businesses.”

“While the intent of this statute is straightforward, it has been one of the most challenging post-financial crisis rules for both regulators and banking entities to implement,” said FDIC Chairman Jelena McWilliams, in a statement. “To facilitate capital formation, the (new) rule would enable banking entities to provide credit through fund investments that would increase the availability of capital for businesses across the country.”

However, Martin J. Gruenberg, a member of the FDIC board, indicated that he planned to vote against the changes to the Volcker Rule.

“Today’s Final Rule would allow the largest, most systemically important banks and bank holding companies once again to engage in investments and relationships with high-risk funds that resulted in large losses, and contributed to the failure or near-failure of large financial firms in the 2008-2009 financial crisis,” Gruenberg said in a statement.