$70 billion in quarterly profits

Last week, President Donald Trump signed sweeping legislation rolling back banking regulations. But that law was aimed largely at helping community and regional banks.

The changes to the rule are expected to boost the profits of some of the industry's biggest players, from Goldman Sachs to JPMorgan Chase, industry analysts say. It comes at a time when the banking industry is already hauling in record profits - $US56 billion ($70 billion) during the first quarter of 2018 - and regulators are warning that some banks have been taking on more risks.

"Some banks have responded by 'reaching for yield' through investing in higher-risk and longer-term assets," Martin J. Gruenberg, the chair of the Federal Deposit Insurance Corp., said last week. The FDIC is a government agency providing insurance for deposits in US banks.  "Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path."

Supporters of the Volcker Rule, which was adopted in 2013, say financial institutions that make loans and offer checking and savings accounts shouldn't be taking on the same type of risks as hedge funds. Restricting risky trading under the rule, which was named for Paul Volcker, former chair of the Federal Reserve, has made the financial system safer, they say.

Billions in compliance costs

But the banking industry has complained for years about the difficulty in determining what type of trading is too risky. Regulators have estimated that the initial rule, which was finalised in 2013, cost banks billions in compliance costs in addition to their missing out on potential profits as some trading activity was eliminated.

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The banking bill signed by Trump last week already offered the industry some relief: It exempted small financial institutions with less than $US10 billion in total assets from the rule. But big banks have been calling for more sweeping changes.

The proposed new rule, dubbed Volcker 2.0, will give large Wall Street banks more trading freedom, according to a person familiar with the process. It will narrow the definition of risky trading to allow more deals to go through and offer banks more flexibility in complying with the rule, industry analysts say. It was designed to lower the burden banks face to prove that short-term trades don't violate the rule.

"We expect the proposal will focus on clarifications and simplification measures to the existing rule, but will not completely gut the limit on proprietary trading at depository institutions," Ed Mills, a research analyst at Raymond James, said in a research note.

But consumer advocates have warned that banks could exploit even a small loophole created by regulators. The rule's complexity is a byproduct of lawmakers' and regulators' attempts to accommodate the industry's initial concerns, they argue. And despite the rule's complexity, banks have rebounded from the financial crisis with record profits.

"They are trying to get rid of the rule now that they have a sympathetic administration," said Marcus Stanley, policy director at Americans for Financial Reform, a nonprofit advocacy group.

Along with the Federal Reserve, four other banking regulators, including the FDIC and the Commodity Futures Trading Commission, must also approve any changes to the rule. The FDIC is expected to vote on Thursday.

The Washington Post