In a further weakening of restrictions on the banking industry, U.S. regulators have adopted a final rule allowing small, government-insured banks to make speculative investments for their own profit.

The move by five federal agencies exempts community banks from the Volcker Rule, a key component of the post-crisis Dodd-Frank reforms that bars banks from engaging in proprietary trading as well as holding ownership in hedge funds or private equity funds.

Proprietary trading occurs when a bank trades a financial instrument with its own money in order to make a profit for itself rather than a client.

The Volcker Rule exemption applies to community banks with $10 billion or less in total consolidated assets and total trading assets of liabilities of 5% or less of total consolidated assets.

The Trump administration has been rolling back parts of the Dodd-Frank law as part of its anti-regulatory push. The banking industry has complained that the Volcker Rule, which went into effect in July 2015, is too complex and interferes with banks’ ability to provide market liquidity.

Supporters of Dodd-Frank have warned that watering down the rule could put taxpayers at risk for future bailouts.

As the Los Angeles Times reports, proprietary trading by large Wall Street firms “was a factor in the 2008 crisis as banks made risky bets on the market through stock, derivatives and other complex financial instruments. When many of those investments backfired, taxpayers ended up picking up the tab through hundreds of billions of dollars in bailouts.”

Regulators have stopped short of repealing the rule for large banks, focusing on clarifying what constitutes proprietary trading. They have proposed that banks with trading operations of at least $10 billion in assets — which account for about 95% of trading activities — be required to have a “comprehensive compliance program.”

The new regulation for community banks implements a bipartisan bill that President Donald Trump signed into law in May 2018.

Photo: Mark Wilson/Getty Images

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