Proposed Fed Rules Could Allow Banks To Fund Startups

A proposed change to a post-financial crisis rule could shake things up for banks, making it easier for them to invest in or sponsor venture capital funds, The New York Times reported.

The Federal Reserve unveiled the proposal Thursday along with other banking agencies. Under the proposal, the Volcker Rule will be revamped. The Volcker Rule was created with the 2010 Dodd Frank bill, keeping banks like Goldman Sachs, JPMorgan and others from making risky bets with customer deposits. It also prevented firms from investing in or sponsoring hedge funds.

But now, new proposed changes would loosen those regulations.

The changes would allow banks to invest in some credit funds, and either sponsor or take ownership roles in venture capital funds that pool money from the ultra-wealthy and make investments of a risky nature in startups. Those investments can lead to either huge wins or devastating losses.

There would be some restrictions on the new rules, such as not allowing banks to guarantee funds in their investments.

The changes were posed as “common sense” by regulators, adjustments that would allow banks to better support small businesses by providing capital. Federal Reserve Chairman Jerome H. Powell said the new changes would let banks provide services that the Volcker Rule wasn’t trying to squash, such as providing limited service to cover some funding needs.

One member of the Fed in opposition to the change was Lael Brainard, the last appointed by President Barack Obama still holding her job. Brainard said the rule change would weaken post-crisis safety nets and allow for risk-taking that could be dangerous — the kind of risks the Volcker Rule was intended to prevent.

Brainard said the change opens the door for firms to invest without limit in venture capital interests and more.

President Donald Trump’s banking regulations have been slowly eroding the rules enacted after the 2008 financial crisis, with the new rules marking the second round of bank-friendly changes to the Volcker Rule.