Many banks and brokerages were using their company’s own money to invest in derivatives such as mortgage-backed securities and other complex financial instruments.
The eventual collapse of the subprime mortgage market — loans to borrowers with poor credit histories — created a ripple effect that led to the collapse of Bear Stearns, Lehman Brothers, Washington Mutual and countless other firms.
Giant banks wound up needing to receive hundreds of billions of dollars in federal bailout money to stop the bleeding.
The regulators said that the changes wlll allow banks to “allocate resources to a more diverse array of long-term investments in a broader range of geographic areas, industries, and sectors than they may be able to access directly.”
The new rules are estimated to potentially free up as much as $40 billion for the big banks.
It’s also the latest example of how regulators in the Trump administration are undoing much of the Obama-era rules put into place to curb bad behavior by big banks.
The FDIC, Fed and other agencies had already neutered the part of the Volcker rule that restricted so-called proprietary trading by banks, the practice of investing with the firm’s own funds instead of bets for clients.
Bankers cheered the changes.
“We welcome the measured steps taken today by the FDIC, which will allow banks to further support the economy at this challenging time for the nation,” said Rob Nichols, president and CEO of the American Bankers Association in a statement..
“The FDIC and other banking regulators have unnecessarily increased risks to the US banking system and jeopardized the savings of every American with money deposited at Wall Street’s biggest FDIC insured banks that are involved in global derivatives dealing,” said Joseph Cisewski, senior derivatives consultant and special counsel with Better Markets, a nonprofit group.
The new rules come just a few hours before the Fed is set to release the results of the so-called stress tests for big banks — a kind of report card that has been in place since the financial crisis.
CNN Business’ Matt Egan, Anneken Tappe and Jeanne Sahadi contributed to this story.