United States: Bank regulators ease restrictions on venture capital investment
Five U.S. federal financial regulatory agencies jointly announced yesterday that they’ll lift certain banking restrictions related to “covered funds.” The restrictions are part of the Volcker rule, put in place in the wake of the 2008 financial crisis. According to the Federal Reserve, the Volcker rule “generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds.”
The changes were announced June 25 by phone call and will take effect October 1, 2020. The new rules will not only make it easier for banks to invest in venture capital funds and other previously restricted funds, they’ll also loosen the requirements that oblige banks to reserve cash when affiliates from a single firm trade derivatives. Industry experts estimate that this change could liberate up to $40 billion in cash reserves.
The New York Times reports that the final rule announced this week “is broadly similar to a proposal the agencies had put forward last January.” The January proposal notes that changing the definition of "covered fund" to exclude venture capital funds will “help ensure that banking entities can fully engage in this important type of development and investment activity, which may facilitate capital formation and provide important financing for small businesses, particularly in areas where such financing may not be readily available.”
In other words, starting in October, banks will be able to invest in VC funds that in turn finance small- and medium-sized businesses and startups.
The Volcker rule changes were developed by the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.