Goldman Sachs Group Inc. and other Wall Street banks can breathea sigh of relief after the Federal Reserve said Monday that itwould give them more time to meet Volcker Rule requirements tounload hard-to-sell stakes in private-equity firms and hedgefunds.

Banks can be granted as long as five years from the current July21 compliance date to divest holdings that are consideredespecially illiquid, the Fed said in a statement Monday. Thecentral bank said that it probably will grant such extensions aslong as lenders have demonstrated “meaningful progress” towardmeeting Volcker requirements.

“The board expects that the illiquid funds of banking entitieswill generally qualify for extensions,” the Fed said in itsstatement.

The Volcker Rule, named for former Fed Chairman Paul Volcker,aimed to dial back banking-industry risks by banning lenders fromspeculating on markets with their own money and limiting theirinvestments in hedge funds and private-equity funds. Banks havebeen seeking more time to comply with that second requirement,arguing that in some cases they might have to take losses. Earlierthis year, the Fed granted the last of three one-year “generalconformance” extensions allowed by the Dodd-Frank Act.

Sizable Holdings

Most of the big banks have pulled out of these investments,though Goldman Sachs and Morgan Stanley still have sizableholdings. Goldman Sachs reported in its most recent quarterlyfinancial results that it still held as much as $6.9 billion ininvestments affected by Volcker, with most of that inprivate-equity funds.

“To the extent that the underlying investments of particularfunds are not sold within the conformance period, the firm may berequired to sell its interests in such funds,” Goldman Sachs saidin its third-quarter filing.

Morgan Stanley reported last month that it had about $2.2billion still invested in private funds and that it was waiting tohear from the Fed on the final five-year extensions.

“While we expect to request additional extensions for theoverwhelming majority of the investments, we also continue toconsider various alternatives to be in compliance with the VolckerRule, including sales, redemptions and liquidations,” MorganStanley said in a Securities and Exchange Commission filing.

The new get-out-of-Volcker pass would be granted on acase-by-case basis, requiring the banks to submit applications foreach individual investment. Those applications will have to detailhow they have tried to sell the funds in the past and how they'llmanage to cash them out within the new time period.

The Fed said Monday that it may not grant extensions if it hasconcerns that banks are trying to evade the Volcker Rule or iflenders are found to have deficient compliance programs.

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