U.S. Regulators Face Grilling on Volcker Rule, Dodd-Frank

U.S. lawmakers questioned regulators implementing the Dodd-Frank Act today about their progress on rules aimed at preventing a repeat of the 2008 credit crisis, including a ban on proprietary trading by Wall Street firms.

The Treasury Department, Federal Reserve and other agencies have spent more than a year drafting rules required by the law, from new oversight for the $708 trillion global swaps market to tools for winding down failing financial firms and enhanced supervision of the largest and most complex companies.

“The ultimate shape of both individual requirements and overall reform is becoming clearer by the week,” Deputy Treasury Secretary Neal Wolin said in remarks prepared for the Senate Banking Committee hearing. “Increasingly, financial firms are in a position to adjust their business models in anticipation of final rules.”

Regulators are working on hundreds of rules required by Dodd-Frank, Congress’s response to the credit market collapse that forced lawmakers to approve bailouts for financial firms including Goldman Sachs Group Inc. and JPMorgan Chase & Co. The Senate panel called regulators to testify on the progress as agencies struggle to meet deadlines amid budget cuts and strained resources.

‘Timely Resolution’

Senator Tim Johnson, the South Dakota Democrat who leads the Banking Committee, called for a “timely resolution” to outstanding rulemakings such as the Volcker rule, which would ban proprietary trading by banks that benefit from deposit insurance and Fed borrowing privileges.

“I recognize that these rulemakings are difficult, but this is the time when tough decisions have to be made by our regulators,” Johnson said in his opening statement.

Regulators have sought increased resources from Congress, which has been caught between House Republicans working to cut spending and Senate Democrats looking to protect the law.

Mary Schapiro, chairman of the Securities and Exchange Commission, said her agency won’t be able to do its job without a bigger budget.

“If the SEC does not receive additional resources, many of the issues highlighted by the financial crisis and which the Dodd-Frank Act seeks to fix will not be adequately addressed,” Schapiro said in prepared testimony. The SEC “desperately” needs new specialized staff and technology, she said.

‘Wringing Efficiencies’

The new Dodd-Frank duties “are so significant that they cannot be achieved solely by wringing efficiencies out of the existing budget,” Schapiro said in her statement.

A draft of the Volcker rule, released by regulators in October, has drawn criticism from both Democratic and Republican lawmakers as well as banks. Goldman Sachs and JPMorgan have already shuttered proprietary trading desks in advance of the pending prohibition.

The multiagency rule, named for former Fed Chairman Paul Volcker, would ban banks from making trades for their own accounts while allowing them to continue short-term trades for hedging or market-making. It also would limit banks’ investments in hedge funds and private-equity funds.

Senator Richard Shelby of Alabama, the top Republican on the Banking Committee, criticized the draft of the rule, saying it lacked clarity and a sign-off from the Commodity Futures Trading Commission, which chose not to endorse it.

“The proposal to implement the Volcker rule has been marred by misconduct, ambiguity and interagency discord,” Shelby said.


CFTC Chairman Gary Gensler said it was a lack of “capacity” rather than disagreement that drove his agency’s decision not to join other regulators on the Volcker draft. The CFTC’s version of the rule would look similar, he said.

“I would envision that we would move forward with the proposal consistent with what other regulators have done,” Gensler told lawmakers.

A coalition of U.S. and international banking trade groups wrote to regulators on Nov. 30 requesting a delay in the comment period for the draft version of the rule, citing members -- which include Bank of America Corp. and Citigroup Inc. -- that are still trying to understand the proposal.

“Our members are deeply concerned about the potential impact of the proposal on capital formation, markets and liquidity for a range of asset classes and on the safety and soundness of banking entities and the businesses in which they engage,” the Financial Services Forum, Securities Industry and Financial Markets Association, Financial Services Roundtable, American Bankers Association and Institute of International Bankers wrote in the letter.

‘Intensive Study’

The Volcker proposal is “the result of months of intensive study and analysis by the agencies,” John Walsh, acting comptroller of the currency, said in his opening statement. The public comment period closes Jan. 13.

The Federal Deposit Insurance Corp., which was given increased responsibilities to resolve failing financial firms deemed a systemic risk, is working with overseas regulators to coordinate the resolution process for firms with operations abroad, said Martin Gruenberg, the agency’s acting chairman.

“In the wake of the financial crisis, there has been an increased international awareness of the need for greater inter-jurisdictional cooperation in the planning for resolution of specific cross-border institutions,” Gruenberg said in his opening remarks.

Fed Governor Daniel Tarullo said banks need to build sufficient reserve capital to avert taxpayer-funded bailouts similar to the $700 billion Troubled Asset Relief Program.

Dodd-Frank requires the Fed to impose stricter capital standards for U.S. banks with total assets of $50 billion or more. In addition, the Basel Committee is establishing a surcharge for global banks with a large systemic footprint.

“The best way to avoid another TARP is for our large regulated institutions to have adequate capital buffers, reflecting the damage that would be done to the financial system were such institutions to fail,” Tarullo said in testimony to the panel.

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