PE still constrained in Treasury’s Volcker review

Banks’ investments in private equity would remain limited under amendments to the Volcker Rule recommended by the US Treasury Department, with the restrictions relaxed.

The Treasury’s review of proposed changes to financial regulation zeroed in on the rule and said the current definition of covered funds – in which banks are not allowed to invest more than 3 percent of tier 1 capital – is too broad. It recommended the adoption of a “simple definition of a covered fund focused on the characteristics of hedge and private equity funds.”

The department also recommended some concessions, proposing to extend the current one-year seeding period for new funds – during which banks are allowed to own up to 100 percent of the seed capital in a private equity fund – to three years.

It added that banks can bypass the Volcker Rule altogether if they hire more compliance staff.

“Consideration should be given to highly capitalised banks that adhere to trader mandates and ongoing supervision and examination to reduce risks to be permitted to opt out of the Volcker Rule,” the document said.

There was no mention in the report of the Financial Choice Act, a piece of legislation that was recently passed by the House that proposes axing the Volcker Rule in its entirety.