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Regulators Defend Volcker Rule Ban on Proprietary Trades

Acting U.S. comptroller of the currency John Walsh. Photographer: Joshua Roberts/Bloomberg
Acting U.S. comptroller of the currency John Walsh. Photographer: Joshua Roberts/Bloomberg

Jan. 18 (Bloomberg) -- U.S. House Republicans pressed regulators on the merits of a proposal to ban banks from trading for their own accounts, as one official acknowledged the rule could put banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. at a competitive disadvantage.

Banks without U.S. operations could benefit because foreign jurisdictions haven’t adopted measures resembling those proposed in the Volcker rule, Acting Comptroller of the Currency John Walsh said today at a House Financial Services joint subcommittee hearing in Washington.

“U.S. banks competing with these foreign banks will operate at a competitive disadvantage,” Walsh said in his prepared remarks, responding to a question from the panel’s Republican members.

Regulators have been on the defensive since the Federal Reserve and three other agencies released a first draft of the rule in October. Lawmakers, financial firms and international regulators have faulted the 298-page proposal as too complex and potentially damaging for financial markets.

“The proprietary trading prohibition in the Volcker Rule statute itself will undoubtedly affect the trading behavior of banking entities,” said Fed Governor Daniel K. Tarullo. “Indeed, that is what Congress intended.”

Proprietary Trading

The proposed rule named for former Fed Chairman Paul Volcker, who championed the idea as an aide 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 their investments in private-equity and hedge funds. The rule, required by the Dodd-Frank Act, must be in place by July 21.

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.

The measure as proposed by regulators would be a “self-inflicted wound,” House Financial Services Committee Chairman Spencer Bachus said 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.

Overly Complex

Republicans and Democrats at today’s hearing echoed the banking industry’s view that regulators have created a measure that is overly complex and difficult to understand.

“The result of their efforts is a proposed rule that is nearly 300 pages long, and asks more than 1,300 questions for comment from market participants,” said Representative Shelley Moore Capito, a West Virginia Republican who leads one of the two subcommittees holding today’s hearing. “This has led to significant confusion -- and I will put myself in that boat -- and many unanswered questions over the consequences.”

Representative Barney Frank, a Massachusetts Democrat, said the complexity stems in part from regulators’ efforts to meet the needs of the financial industry.

“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.”

Goldman Sachs

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.

Consumer groups and Volcker rule supporters have leaned on regulators to stick to the implementation timeline and fought assertions that the measure will damage capital markets.

Financial firms’ arguments “are all founded on the irrational assumption that, once bank proprietary trading ceases under the Volcker Rule, others will not expand to meet demand,” Wallace C. Turbeville, a former Goldman Sachs banker, said in testimony prepared for the hearing on behalf of Americans for Financial Reform, a coalition of consumer groups, labor unions and civil rights law firms.


“It is specious to the point of misleading to suggest that the needs for liquidity currently provided by banks will not be filled,” Turbeville said.

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 in prepared remarks.

Regulators Pressured

Representative Randy Neugebauer, a Texas Republican who leads one of the two panels holding today’s hearing, has joined Bachus and other lawmakers in calling on regulators to resubmit the proposal and consider extending the implementation timeline.

“If the proposed regulations are implemented in their current form, those regulations will dramatically reduce liquidity across multiple markets, which will in turn make it more expensive for businesses to borrow, invest in research and development and create jobs,” Bachus and a group of lawmakers wrote in a Dec. 7 letter to regulators.

Regulators, bowing to pressure from lawmakers and industry groups including the Financial Services Roundtable and the U.S. Chamber of Commerce, announced in December a 30-day extension of the comment period to Feb. 13. The extension also gave the Commodity Futures Trading Commission time to complete its largely similar proposal, which was released for comment on Jan. 11.

To contact the reporter on this story: Phil Mattingly in Washington at; Cheyenne Hopkins at

To contact the editor responsible for this story: Lawrence Roberts at

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