Volcker rule opponents are making their case for alternatives to the proprietary trading ban at a U.S. House Financial Services Committee hearing as regulators move closer to completing work on the Dodd-Frank Act measure.
Today’s hearing will be the last in this session of Congress on the impact of the restrictions for banks that benefit from federal deposit insurance and discount borrowing. Financial-industry representatives will argue for higher capital standards rather than the rule’s outright trading ban, according to testimony prepared for the hearing.
Efforts to finalize the multi-agency rules, which have taken more than a year so far, will be complicated the departure of Securities and Exchange Commission Chairman Mary Schapiro, who is stepping down tomorrow. No regulators are scheduled to testify at the House hearing.
“It’s obvious that since they haven’t put anything out they are having difficulty among the members of the ruling class in trying to decide what the outcome is going to be,” Tim Ryan, chairman and chief executive officer of the Securities Industry and Financial Markets Association, said in an interview yesterday.
The House committee scheduled the hearing after an August request from Representative Spencer Bachus, the Alabama Republican who leads the panel, for suggested alternatives to the Volcker rule. Most industry responses proposed higher capital standards instead of a ban.
Rule Delays
The rule, which regulators first proposed in October 2011, drew 18,000 comment letters, many from banks complaining that it was too complex and could hurt economic growth. Named for former Federal Reserve Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, is intended to prevent deposit-taking banks from putting depositors’ money at risk.
Regulators, who had said they expected to finish the rule by the end of the year now expect to complete their work early next year, according to Fed Chairman Ben S. Bernanke. The Fed is one of five regulators working on the measure.
“I think there is quite a bit of agreement -- I wouldn’t say a final agreement -- but quite a bit of agreement on key points among the regulators at this juncture,” Bernanke said at a news conference. “So it’s our intent to try to get this done early in 2013.”
Bachus and Representative Jeb Hensarling of Texas sent a letter to regulators on Nov. 29 requesting a delay of the rule’s effective date for two years after the final version is issued. They cited disagreements among regulators and a lack of transparency in the rule writing.
July Compliance
The Fed in April said banks have until July 2014 to fully conform their activities and investments to the Volcker restrictions. The Fed has the authority to extend that date.
Dodd-Frank charges five agencies -- the Office of Comptroller of the Currency, Federal Deposit Insurance Corp., the Commodity Futures Trading Commission, the Fed and the SEC -- to write regulations implementing the rule. The Treasury Department must coordinate the agencies’ rulemaking.
When Schapiro steps down this week, she’ll leave behind a commission composed of two Democrats and two Republicans. The split could delay dozens of rules, including Volcker.
The industry has complained the complex rule will have unintended consequences.
Complexity Level
“The level of complexity is so high and your need to do as little damage as possible to the capital markets is so great you need to change your thinking,” Sifma’s Ryan said yesterday. “The idea that the presumption which they built into the original proposal which is prop trading unless you can prove otherwise, really needs to be flipped the other way.”
Representative Barney Frank, the Massachusetts Democrat who co-wrote the law that created the Volcker rule, said its complexity is a product of changes the industry requested.
“When the Volcker rule was first proposed, many in the financial community asked that it take into account this that and the other,” Frank, who is retiring, said at today’s hearing. “There’s been an effort to try to accommodate this, and now that’s being used against the people who have listened to some of these comments.”
Dennis Kelleher, president and chief executive officer of Better Markets Inc., said in fact the Volcker rule isn’t as complex as bankers claim.
Speculative Bets
“The Volcker rule is, in many ways, very simple: It prohibits the handful of biggest too-big-fail banks from making high risk speculative bets, typically very, very big bets, usually but not always with the banks’ own money as distinguished from investing and trading their customers’ money on their customers’ behalf,” he said in testimony prepared for the hearing. “This type of trading is nothing more than gambling.”
The rule also limits banks’ investments in private-equity and hedge funds. The industry has argued that the rule’s definition of such funds is too broad and would encompass other securitized vehicles used for lending.
“Unless corrected through regulation or legislation this over-breadth could prohibit securitization vehicles, cash management entities, certain joint ventures and even internal holding companies simply because they meet a technical legal standard that is common among true investment funds,” Thomas Quaadman, vice president of the Center for Capital Markets Competitiveness at the Chamber of Commerce, wrote in prepared testimony.