U.S. regulators, responding to criticism of their Volcker rule proposal, told lawmakers they will refine plans for the ban on banks’ proprietary trading while resisting calls to scrap the measure and start over.
Federal Reserve Governor Daniel Tarullo joined top officials from four other agencies in defending the 298-page rule today at a House Financial Services joint subcommittee hearing in Washington, faulting Congress for imposing complexities that led Committee Chairman Spencer Bachus to say the measure as proposed would be a “self-inflicted wound.”
“Congress actually laid out seven key permitted activities, or if you wish, exceptions,” Commodity Futures Trading Commission Chairman Gary Gensler told lawmakers, citing underwriting, market-making and hedging as critical exemptions. “We want to fully comply with the intent of Congress.”
Lawmakers called the regulators to testify amid criticism from House Republicans and banking-industry groups that the Dodd-Frank Act measures proposed by four agencies in October and the CFTC this month would sow confusion among banks over which activities were permitted and put firms such as Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. at a competitive disadvantage to overseas rivals. Tarullo, who said regulators would review comment letters in determining the need for adjustments, resisted suggestions that the rule be withdrawn.
Bachus, who called on regulators to resubmit the proposal and consider extending the implementation timeline in a Dec. 7 letter, outlined his criticisms at today’s hearing.
“The rule’s impact on market liquidity, access to credit, the cost of capital and job creation will unnecessarily stifle the growth of businesses that operate far from Wall Street, and hamper the ability of asset managers, pension funds and insurance companies to grow their portfolios for millions of individual investors,” said Bachus, an Alabama Republican.
The proposed rule named for former Fed Chairman Paul Volcker, who championed the idea as an adviser to President Barack Obama, would ban banks from proprietary trading while allowing them to continue short-term trades for market-making or hedging. It also would limit investments in private-equity and hedge funds. Dodd-Frank, enacted in response to the 2008 credit crisis, requires that the rule be in place by July 21.
Regulators acknowledged industry concerns, including the idea that banks without U.S. operations could benefit because foreign jurisdictions haven’t adopted similar measures.
“U.S. banks competing with these foreign banks will operate at a competitive disadvantage,” Acting Comptroller of the Currency John Walsh said in his prepared statement, responding to a question from Republican members of the two Financial Services subcommittees that held the hearing.
Congress included the rule in Dodd-Frank to curb risky trading by banks that benefit from deposit insurance and Fed discount window borrowing. Financial firms, in comment letters to regulators and in public statements, have said the rule may restrict market liquidity, specifically in corporate bonds.
Democrats such as Representative Carolyn Maloney of New York joined Republicans at today’s hearing in echoing the banking industry view that the proposed rule is too complex.
Representative Barney Frank, a Massachusetts Democrat, said that complexity stems partly from regulators’ efforts to meet the industry’s needs.
“A very simple rule could have been formulated, but it would not have accommodated the concerns you have of the financial institutions,” said Frank, who led the Financial Services Committee during the talks that yielded the regulatory law that bears his name. “So to some degree they are complaining about you having accommodated them.”
‘Flow of Capital’
Goldman Sachs Chief Financial Officer David Viniar addressed the Volcker rule during an investor call after the company reported fourth-quarter financial results today, saying the Wall Street firm wants to ensure the measure doesn’t inhibit “the free flow of capital and the growth of the U.S.”
“We want to make sure that the market-making rules are not written in such a way that they make it so onerous for us and not just us but for all the firms to continue our market making function,” Viniar said.
Securities and Exchange Commission Chairman Mary Schapiro said regulators have “no interest” in sanctioning banks that run afoul of Volcker rule limits on proprietary trading while attempting legitimate market-making.
“We have no interest in pursuing activity where people are intending to provide market-making and get it wrong,” Schapiro told lawmakers.
Tarullo called the proposal released by regulators “the most feasible,” knocking down alternatives including self- reporting of violations of principles-based rules by covered firms or creating “definitive bright lines” on what type of trading is permitted or banned.
“The more nuanced framework contained in our proposal was designed to realize some of the advantages of both of these approaches while minimizing their potential adverse effects,” Tarullo said.
The Fed, FDIC, SEC and OCC bowed to pressure from lawmakers and industry groups including the Financial Services Roundtable and the U.S. Chamber of Commerce in extending the Volcker rule comment period through Feb. 13. That extension also gave the CFTC time to complete its largely similar proposal, which was released for comment on Jan. 11.