[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF THE VOLCKER RULE
ON JOB CREATORS, PART I
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 15, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-59
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York PATRICK MURPHY, Florida
STEVE STIVERS, Ohio JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
January 15, 2014............................................. 1
Appendix:
January 15, 2014............................................. 65
WITNESSES
Wednesday, January 15, 2014
Bentsen, Hon. Kenneth E., Jr., President and Chief Executive
Officer, the Securities Industry and Financial Markets
Association (SIFMA)............................................ 9
Funk, Charles, President and Chief Executive Officer, MidWest One
Financial Group, on behalf of the American Bankers Association
(ABA).......................................................... 11
Ganz, Elliot, Executive Vice President and General Counsel, the
Loan Syndications and Trading Association (LSTA)............... 14
Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship, MIT
Sloan School of Management..................................... 12
Robertson, David C., Partner, Treasury Strategies, Inc., on
behalf of the U.S. Chamber of Commerce......................... 15
APPENDIX
Prepared statements:
Bentsen, Hon. Kenneth E., Jr................................. 66
Funk, Charles................................................ 86
Ganz, Elliot................................................. 97
Johnson, Simon............................................... 104
Robertson, David C........................................... 111
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Written statement of the American Association of Bank
Directors.................................................. 122
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 126
Ellison, Hon. Keith:
Washington Monthly article by Haley Sweetland Edwards
entitled, ``He Who Makes the Rules,'' dated March/April
2013....................................................... 127
Foster, Hon. Bill:
Written responses to questions submitted to Hon. Kenneth E.
Bentsen, Jr................................................ 147
Perlmutter, Hon. Ed:
Bloomberg article by Kasia Klimasinska entitled, ``U.S. Posts
Record December Surplus on Fannie Mae Payments,'' dated
January 13, 2014........................................... 148
Amendment to the Dodd-Frank Act offered by Representatives
Miller of North Carolina and Perlmutter.................... 150
THE IMPACT OF THE VOLCKER RULE
ON JOB CREATORS, PART I
----------
Wednesday, January 15, 2014
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Bachus, Royce,
Capito, Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey,
Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Fincher,
Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr,
Cotton, Rothfus; Waters, Maloney, Velazquez, Sherman, Meeks,
Capuano, Lynch, Scott, Green, Moore, Ellison, Perlmutter,
Himes, Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema,
Beatty, and Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time.
The hearing today is entitled, ``The Impact of the Volcker
Rule on Job Creators, Part I.'' I wish to alert all Members
that we have already scheduled Part II of the hearing on this
topic on February 5th. It will be with regulators who
promulgated the rule.
I will now recognize myself for 5 minutes to give an
opening statement.
As a Nation, we just marked the 50th anniversary of the War
on Poverty, tragically a failure on more than one level. To
win, we need more jobs, which means we need less Volcker.
In 2 weeks, the President will deliver his sixth State of
the Union Address. Early in his term, he received from the
Democratic Congress every single major policy initiative he
asked for: the stimulus; Obamacare; and the Dodd-Frank Act from
which the Volcker Rule arises. He got it all. The results of
this are an unprecedented spending spree and a regulatory
tsunami, the effects of which are now apparent to all. We have
become a part-time worker, unemployment check, food stamp,
insolvent Nation with few opportunities and even fewer hopes
for the truly needy amongst us.
The President's policies have exacerbated the very income
inequality that he now decries. Under President Obama, 6.7
million more Americans have fallen into poverty. America is
suffering under the highest poverty rate in a generation,
median household income has fallen each year that he has been
in office, and a record 47 million Americans receive food
stamps.
With a record like this when it comes to the War on
Poverty, some Americans may just wonder which side the
President is on. And if history proves a reliable guide, during
the State of the Union Address the President will offer more of
the same: more food stamps; more unemployment checks; and more
minimum wages, all neatly wrapped in the politics of division,
redistribution, and envy. That is not right, that is not fair,
and it is not what hard-working, struggling families in the
Fifth District of Texas are looking for.
Joseph of Mabank, Texas, told me, ``I am a disabled veteran
and have been without work for over a year. All I want is to
have a good-paying job and let the rest come as it happens.''
Claudia from Mineola, in my district, was laid off for 9
months. She finally found a job that paid her 25 percent less
and added 60 miles to her daily commute. She said, ``I don't
have the American taxpayers bailing me out or lending me money
that I can't pay back.''
It is for Joseph and Claudia and all of the unemployed and
underemployed Americans that we have to fight, and you cannot
win a war on poverty as long as you are conducting a war on
jobs.
And that brings us to the subject of today's hearing, the
900-plus page compound, complex, confounding, confusing,
convoluted Volcker Rule. Like most of the other 400-plus rules
of Dodd-Frank, the Volcker Rule is aimed at Wall Street but it
hits Main Street, and regrettably the poor and downtrodden
amongst us become collateral damage.
First, Volcker is a solution in search of a problem. It is
important to note that of the roughly 450 financial
institutions which failed during or as a result of the crisis,
not a single one failed because of proprietary trading. In
fact, financial institutions which varied their revenue stream
were better able to weather the storm, and thus keep lending,
and thus support jobs. Instead, these bank failures have come
largely from concentration in lending in the subprime and
sovereign debt markets. And who steered these financial
institutions into these markets? Sadly, but not surprisingly,
it was Washington, and they are still at it.
At one of our earlier hearings on the Volcker Rule, a
Democratic witness claimed the burdens placed on our economy by
Volcker were no big deal because ``it only applies to just a
few banks.'' If thousands upon thousands of negative comments
the regulators received in response to their proposal from
community and regional banks, and businesses both big and
small, do not lay that claim to rest, I believe today's hearing
will.
The statement that Volcker only applies to just a few banks
ranks right up there with, ``If you like your health care plan,
you can keep it.'' For if it were true that the 900-plus page
regulation applies to just a few banks, why did the Public
Utility Commission in my native Texas warn that my constituents
could experience higher and more volatile electricity prices
because of Volcker? That is higher electricity prices for the
poor. And why will the Volcker regulation, as one study points
out, take $800 billion out of the productive economy and
sideline it? That is the equivalent of taking more than $6,900
out of every American household's paycheck.
As a Nation, we can do better. We must do better. The path
out of poverty is not food stamps or unemployment checks, it is
not the culture of victimization or the politics of envy, and
it is certainly not the Volcker Rule, which will harm many of
our capital markets, equity joint ventures (EJVs),
collateralized debt obligations (CDOs), venture capital, and
especially the CLO market.
The path out of poverty is well-known. It has everything to
do with strong, faith-based institutions; strong families;
strong communities of support; strong schools designed for
students, not teachers' unions; and small businesses and
entrepreneurship with access to affordable and available
capital so there are boundless job opportunities for all,
especially the poor, and as chairman of this committee, this is
what we will work toward.
The Chair now recognizes the ranking member, Ms. Waters,
for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. Normally, I
would thank you for holding a hearing, but it looks as if this
hearing that you have called is more focused on an attack on
the President and the Administration than really dealing with
the Volcker Rule, so I am going to try and direct my comments
to the Volcker Rule.
It has been more than 5 years since the beginning of the
financial crisis which resulted in the largest destruction of
wealth in a generation. And while many observers still disagree
about its central cause, we know that proprietary trading
played a significant role. Such trading has indeed produced
tremendous profits for some of our largest financial firms, but
it also contributed to losses during the height of the crisis.
In fact, one academic study estimated that by mid-April of
2008, banks had lost roughly $230 billion on certain
proprietary holdings, which regulators and other interested
parties had believed were simply inventories of assets held to
facilitate client trading.
In the wake of these devastating losses, taxpayers stepped
in to staunch the bleeding, and Congress took action to ensure
that such an emergency would never happen again, enacting
comprehensive legislation to address the many causes of the
crisis, from the bad loans at the heart of the collapse, to the
exotic securitizations that drove the demand for predatory
mortgages, to the opaque derivatives markets that created
tremendous interconnectedness and risk in our financial system.
A key part of Wall Street reform is the Volcker Rule. If
properly implemented, the rule will provide that banks insured
by taxpayer dollars can no longer engage in proprietary trading
or investments in risky vehicles like hedge funds. The concept
of the rule is simple: Loan-making, deposit-taking banks should
not be engaged in risky speculative activity on the backs of
the American taxpayers.
Many observers of our financial system agree with this.
Standard & Poor's has pointed out that, ``the implementation of
the Volcker Rule could have favorable implications for the
credit profiles of some of the largest U.S. banks such as
reducing trading portfolio risk.'' John Reed, the former
Citigroup chairman, notes that, ``A strong Volcker Rule is one
of the most important provisions to prevent too-big-to-fail
financial institutions, stop conflicts of interest, and support
credit in our economy.'' And even Chairman Hensarling has
stated to The Wall Street Journal that, ``We have to do a
better job ring-fencing, fire-walling, whatever metaphor you
want to use, between an inspired depository institution and a
noninsured investment bank.''
In the face of this statutory directive to implement
Volcker, our regulators have undertaken their tremendous task
of wading through 18,000 comments and have engaged with
stakeholders during dozens upon dozens of meetings. We see the
European Union potentially moving forward with a similar
effort, and the United Kingdom has passed legislation
implementing a similar measure known as the Vickers Report. All
of these actions should be applauded.
At the same time, I understand that regulators are working
diligently to address some issues related to the rule that have
come up in the last month, including the issue related to
collateralized debt obligations backed by trust-preferred
securities. Most of the Democratic members of this committee
urge regulators to provide an exemption for banks that would be
consistent with their treatment under the Wall Street Reform
Act. I appreciate the regulators' responsiveness on this point
and believe their recent interim rule has provided important
relief to community banks.
Mr. Chairman, the Volcker Rule will ensure Federal dollars
are no longer used to protect losses from risky trading. Doing
so will protect the U.S. economy from suffering another
debilitating financial crisis, and will ensure taxpayers are
never again asked to rescue failed financial firms. And now
that we have the rule's framework in place, I look forward to
conducting real oversight and ensuring that our regulators are
faithfully enforcing this provision which will be central to
the success of the Wall Street Reform Act.
I thank you, and I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the
gentlelady from West Virginia, the Chair of our Financial
Institutions Subcommittee, Mrs. Capito, for 2 minutes.
Mrs. Capito. Thank you. I would like to thank the chairman
for yielding me time and for having this hearing.
Two years ago, Mr. Garrett and I had a joint hearing
talking about the challenges of the implementation of the
Volcker Rule, so this is our third hearing. And just over a
month ago, five agencies charged with writing this rule
released their final version. Throughout the discussion, the
focus has been to limit certain activities at large complex
financial institutions. However, within hours of the release of
the final rule, it was apparent that financial institutions and
small businesses on Main Street would be significantly affected
by the rule. The ranking member talked about this issue.
Three weeks ago, we learned that financial institutions
which held CDOs backed by trust-preferred securities could be
required to take an immediate writedown on these investments in
order to comply with accounting principles. These potential
losses facing institutions could have been very significant,
and especially punitive for smaller institutions. It is
important to note when the rule was written and published in
December, or before the final rule was published, this issue
was not even a part of the rule to where they could have had
any comment or any public weigh-in on this rule so we could
have averted this.
To me, this just shows you that the uncertainty surrounding
the rollout of the rule is a product of placing artificial
deadlines on the agencies for writing these rules. There
clearly was miscommunication between the agencies, which
brought about these unintended consequences. In fact, the
treatment of CDOs backed by trust-preferreds was not even
mentioned, as I said, and the end result sent hundreds of banks
scrambling with a very tight deadline.
Members of both the House and the Senate, on both sides of
the aisle, have expressed concern in the last few weeks, and I
would like to thank the agencies for releasing an interim rule
last night that provides clarity for how financial institutions
will treat their investments and collateralize debts backed by
trust preferred securities (TruPS). Their interim final rule is
similar to legislation which I authored with Chairman
Hensarling last week.
I look forward to hearing the comments, and I want to thank
the witnesses for coming today. Thank you.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, the ranking member of our Capital
Markets Subcommittee, Mrs. Maloney, for 2 minutes.
Mrs. Maloney. This is an important hearing on the Volcker
Rule, which is named after former Federal Reserve Chair Paul
Volcker, a great New Yorker. Chairman Volcker initially
proposed this ban on proprietary trading because he believes
that banks which receive Federal deposit insurance should be
serving their customers and not making risky bets for their own
accounts. This was a sensible proposal because customer
deposits would be at risk if the bets went wrong.
The GAO report on proprietary trading calls proprietary
trading a leading cause of the financial crisis, which,
according to their report, took over $9 trillion of assets from
our country and affected $12 trillion of economic growth that
would have happened without the crisis.
The road that this rule took from an idea in Chairman
Volcker's head to the final rule was long and difficult. It
involved 5 different Federal agencies plus an oversight
council, over 18,000 comment letters, multiple hearings in
Congress, and now a 71-page final rule with 892 pages of
explanatory notes. And there is still a great deal of work that
needs to be done. Bank examiners will have to work with the
banks to develop the detailed compliance and data reporting
programs for which the rule calls.
So as we press ahead with the implementation phase, I would
urge the regulators to stay committed to a data-driven
approach. If the data shows that there are unintended
consequences, or if liquidity is seriously impaired, then the
regulators need to be willing to make tweaks to the rule to get
the desired outcome. At the same time, if the data shows that
banks are evading the Volcker Rule, then the regulators need to
be equally willing to exercise their authority to crack down.
The Volcker Rule is the law of the land now, so it is important
that we get it right. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, the Chair of our Capital Markets Subcommittee,
Mr. Garrett, for 2 minutes.
Mr. Garrett. Thank you, Mr. Chairman.
Now, 3\1/2\ years after its enactment, the regulatory
tsunami of Dodd-Frank continues unabated. We should all know by
now that Dodd-Frank solved few, if any, of the problems that
caused the financial crisis. For example, instead of actually
solving too-big-to-fail, Dodd-Frank actually codified it.
Instead of taking the time to solve the problems that caused
the financial crisis such as the oversubsidization of the U.S.
housing market by the Federal Government, the failed prudential
regulation, and failed monetary policy by the Federal Reserve,
Congress instead created a solution in search of a problem, and
exhibit A is the Volcker Rule.
As critics have pointed out, the Volcker Rule has the
potential to significantly crimp the legitimate market-making
activities to the detriment of the U.S. financial markets and
disrupt the corporate bond markets, reduce liquidity, drive up
borrowing costs, and harm investors.
Unfortunately, it is difficult to know exactly how
detrimental this rule may be, in part because it lacks clear
rules of the road in favor of regulatory discretion, and in
part because the regulators failed to support it with an
adequate economic analysis. And this is to say nothing of how
the rule will be coherently implemented and enforced by five
separate regulators, each with different mandates and
authorities.
By the way, this is just one rule. We must also consider a
number of other rules that haven't been finalized yet, for
example, the supplemental leverage rule, the liquidity coverage
rule, the risk-based capital rule, the counterparty credit
limits rule, the net stable funding rule, the credit risk
retention rule, the rules for foreign banking organizations,
the rules on security-financing transactions, the pay ratio
rule, the derivative cross-border rules, the SEF rule, the
clearing rules, the position limit rules, the OTC market
rules--I could go on, but I don't have the time.
So what is the cumulative effect of all these rules
together on the U.S. economy and American businesses? Mr.
Chairman, similar to the Volcker Rule, no one really knows,
especially the regulators, all of whom continue to thumb their
nose at the law and continue to not perform the appropriate
economic analysis.
I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from New York, the ranking member of our Financial Institutions
Subcommittee, Mr. Meeks, for 1\1/2\ minutes.
Mr. Meeks. Thank you, Mr. Chairman.
As we sit here today to discuss an important milestone in
our efforts to reform our banking institutions and financial
system, the adoption of final rules to ban banking institutions
from engaging in proprietary trading and investments in private
equity funds and other covered funds is a central piece of our
new financial order that we passed and enacted almost 4 years
ago.
Just yesterday, the Subcommittee on Financial Institutions
held a hearing on the QM rules which became effective just last
week, another major piece of our new financial order. I am very
pleased to see that we have finally made progress through the
effective implementation of these two major financial reforms,
which both in their own way ensure that the clients',
depositors' or mortgagors' interests are preserved and
protected.
The Volcker Rule will finally settle a long-known problem
in our banking system. Clients seeking investment advice or
assistance from their bankers will know for sure that their
bank's own proprietary trading will no longer be able to
conflict with their own interests. We have observed too many
cases here and abroad where aggressive traders chasing the next
big bonus abused this privileged relationship, passing their
own toxic investment to other clients and benefiting from it at
the same time. Moreover, we have seen too many big banks suffer
volatile revenue, and even some go under because of their
engagement in risky trading activities which can lead to
massive losses and insolvency.
I join with the ranking member to make sure the regulators
help with CDOs, and I also ask the regulators to look to clear
up some of the rules with reference to CLOs. I think those
things would help us as we move forward, and I very much look
forward to hearing the testimony of the witnesses.
Chairman Hensarling. The Chair now recognizes the chairman
emeritus of the committee, the gentleman from Alabama, Mr.
Bachus, for 1 minute.
Mr. Bachus. Thank you, Mr. Chairman.
Mr. Chairman, Mrs. Maloney said that the Volcker Rule is
the law of the land. It actually is not the law of the land. It
takes effect on April Fool's Day. And what is the law of the
land? We really don't know.
We started with a 37-word short paragraph in an 846-page
bill, Dodd-Frank, which said you can make markets, but you
can't do proprietary trading. That sounds pretty easy, doesn't
it? Now we have over 900 pages of trying to distinguish between
the two. Often, they are indistinguishable. But I think Federal
Reserve Governor Daniel Tarullo told us what it is. He said a
specific trade may either be permissible or impermissible,
depending on the context and the circumstances under which the
trade was made. That sounds like what Madam Pelosi said about
Obamacare, ``We will have to pass the bill to find out what is
in it.'' And we see how that has worked out. The Weekly
Standard has this train wreck on it which is Obamacare. That
was actually in July.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Ohio for 1
minute.
Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member
Waters.
We have certainly heard a lot about the history and
opinionated views on that short section of Dodd-Frank, Section
6119. So, let's fast-forward to where we are now on the rule:
18,000 comments, a final rule, and nearly 3 years later to
where we are today. Though the regulators wisely developed a
lengthy timetable for implementation, we are currently on the
verge of strengthening our banking system, and improving our
financial markets, and are one step closer to eliminating the
idea that there are certain institutions that are too-big-to-
fail.
With respect to the TruPS, the CDO issue, the joint agency
fix issued last night seems to me to strike the right balance
between exempting only community banks versus exempting all
banks. The regulators have done so by creatively constructing
the exemption not on the basis of the size of the bank holding
the TruPS, but instead on the basis of the size of the banks
issuing the TruPS.
Thank you, and I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Colorado, Mr. Perlmutter, for 30 seconds.
Mr. Perlmutter. Thanks, Mr. Chairman.
In Dodd-Frank we tried to, by an amendment, return to the
separation of commercial banks from investment banks and
insurance companies. That amendment was defeated. An objection
and prohibition against proprietary trading by banks was then
passed by this House, was modified, and became what is now the
Volcker Rule to try to rein in the Wild West approach that
caused our economy to crash in 2008.
So I take the words of Mr. Garrett and the chairman to
heart that that is what they believe, but without something
like the Volcker Rule and Dodd-Frank, this economy would be in
the tank for years and years to come.
With that, I yield back.
Chairman Hensarling. The time of the gentleman has expired.
Today, we welcome five witnesses. First, our former
colleague, Ken Bentsen, Jr., is president and chief executive
officer of the Securities Industry and Financial Markets
Association. Mr. Bentsen served in this House as a Democratic
Member from my native Texas from 1995 to 2003. We welcome him
back today.
Charles Funk is the president and chief executive officer
of MidWest One Bank in Iowa City, Iowa. He previously served as
president, chief investment officer, and senior vice president
of a regional Midwestern bank. He currently serves on the
American Bankers Association's Board of Directors.
Professor Simon Johnson is the Ronald Kurtz Professor of
Entrepreneurship at MIT's Sloan School of Management. He is
also a senior fellow at the Peterson Institute for
International Economics. Professor Johnson's opinions on a
variety of financial subjects regularly appear in mainstream
news and Internet publications. He earned his Ph.D. in
economics from MIT.
Elliot Ganz is the executive vice president and general
counsel of the Loan Syndications and Trading Association, where
he is responsible for managing LSTA's legal and regulatory
affairs and its market practice and standardization
initiatives. He holds a law degree from NYU.
Last but not least, David Robertson is a partner and
director of Treasury Strategies, a consulting firm that
provides advice to corporate and other professional treasurers.
As the leader of financial services practices, Mr. Robertson
works with global and regional banks, payment and liquidity
providers, and regulators.
Each of you gentleman will be recognized for 5 minutes to
give an oral presentation of your testimony. Hopefully, each of
you is familiar with our lighting system of green, yellow, and
red. And please remember to pull the microphones very, very
close to your mouth when you speak. And without objection, each
of your written statements will be made a part of the record.
Mr. Bentsen, you are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., PRESIDENT
AND CHIEF EXECUTIVE OFFICER, THE SECURITIES INDUSTRY AND
FINANCIAL MARKETS ASSOCIATION (SIFMA)
Mr. Bentsen. Thank you. Chairman Hensarling, Ranking Member
Waters, and members of the committee, thank you for providing
me the opportunity to testify.
SIFMA represents a broad range of financial services firms
active in the capital markets. Those who have grappled with the
Volcker Rule at any level deeper than that of a media sound
bite know that balancing the statutory mandate to both prohibit
and permit certain activities and investments in a way that
does not harm the capital markets and the companies,
governments, and investors who rely on those markets is a very
serious business and horribly complex. It is no wonder that the
proposed rule posed over 1,300 questions and that the final
rule runs 71 pages with nearly 900 pages of comments.
SIFMA and our members still believe the Volcker Rule is a
policy response in search of a problem, and we remind the
committee that no other country has adopted a corollary to it.
It is, however, the law of the land, and our members are
committed to complying fully with the rule.
As the rule comes into full force, it will affect many
markets and products. Our preliminary assessment shows that
beyond the impact that will result from the significant new
compliance costs, the rule will also affect venture capital,
equity joint ventures and acquisition vehicles, municipal
financing via tender option bonds, asset-backed commercial
paper, commercial loans and lending via CLOs and CDOs and other
securitizations, and trading of foreign sovereign debts.
I would note that the relief issued yesterday by the
agencies is certainly welcome relief for some, but it has not
resolved the very serious issues regarding collateralized loan
obligations that, left unresolved, will affect the cost of
credit to Main Street businesses which benefit from that
market.
Our members are also beginning to focus on their
conformance plans and the intense compliance programs that the
final regulation requires. But this work is not the end of the
story. Just as the financial sector will have to develop and
implement conformance plans, compliance programs, internal
controls, independent testing and auditing, training and
records and retention, so too will regulators have more work to
do to explain what certain provisions mean and how they are
intended to work.
Most importantly, just as five regulators ultimately
coordinated to write one rule, they must now coordinate and be
consistent in their interpretation, examination, supervision,
and enforcement. A lack of consistency will not only create
unnecessary and costly confusion; it will undermine the rule
itself.
The lack of an explicit mechanism or process for ongoing
regulatory coordination and resolution of differences has
emerged as our member firms' greatest initial concern. Without
it, there is a significant risk that agencies will have
differing interpretations of similar provisions or activities
covered by the rule, resulting in inconsistencies in their
examination, supervision, and enforcement. This will
undoubtedly raise additional compliance burdens that will cause
firms to needlessly restrict activities which are otherwise
explicitly allowed, the net effect of which being the
restriction of capital committed to certain markets and the
resultant reduction in liquidity.
What happens if the SEC and its examiners takes one point
of view for the broker-dealer while the OCC takes another point
of view for the national bank of the same affiliated
institution? Add the complexity of the CFTC reviewing the
activities of the national bank for its registered swap dealer.
What if the FDIC takes one view for nonmember banks and the
Federal Reserve another for member banks?
This concern is significant as we move deeper into firms
planning for conformance, implementation, and development of
compliance regimes. For example, a number of the largest
institutions must begin tracking certain metrics of their
activities by July of this year. Our members have concerns as
to how each agency will interpret the metrics described in the
rule, and how and to which agency they will be reporting.
Differences in approach across agencies would make the metrics
reporting almost impossible, especially given the fact that
metrics reporting will have to be programmed into the computer
systems. Inconsistency in approach could also undermine the
transparency and comparability of the information from
institution to institution, thus making the information far
less valuable.
Regrettably, the final regulations are completely silent on
regulatory coordination. The final Volcker Rule does not
address how interpretations in guidance will be meted out, how
examinations will be coordinated in form and result, how the
agencies will work together on supervision in any respect, or
how various cross-border compliance and coordination issues
will be addressed.
We believe that the immediate goal should be for the
agencies to articulate a transparent and consistent roadmap for
coordination on both near-time interpretive guidance and the
long-term examination and supervisory framework, including
realistic goals on quantitative reporting which prioritize
utility of data. Further, we believe that it is incumbent upon
the FSOC to exercise its authority to coordinate supervisory
activities with respect to the rule as Congress provided for.
Additionally, we strongly believe that there is an oversight
role for Congress to play in ensuring such coordination and the
consistent application of the rule, beginning with this hearing
today.
In conclusion, I wish to stress that there remain many
outstanding questions as to how the Volcker Rule will be
implemented and enforced. There is a strong likelihood that
significant issues may arise in the coming weeks and months
that are simply not on our radar screen today. The Volcker Rule
is that complex. Failure to adequately address these issues
when they arise could result in more compliance burdens that
would undermine the activities beneficial to the economy. We
look forward to working with Congress, our regulators and other
market participants to ensure that the implementation of the
Volcker Rule is not disruptive to the capital markets and the
job creators they support.
With that, I look forward to answering your questions.
[The prepared statement of Mr. Bentsen can be found on page
66 of the appendix.]
Chairman Hensarling. Mr. Funk, you are now recognized for 5
minutes.
STATEMENT OF CHARLES FUNK, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MIDWEST ONE FINANCIAL GROUP, ON BEHALF OF THE AMERICAN
BANKERS ASSOCIATION (ABA)
Mr. Funk. Chairman Hensarling, Ranking Member Waters, my
name is Charlie Funk, and I am president and CEO of MidWest One
Bank and MidWest One Financial Group, a $1.7 billion community
bank headquartered in Iowa City, Iowa. I appreciate the
opportunity to be here on behalf of the ABA to discuss the
unintended consequences of the recently finalized Volcker Rule.
Let me begin by thanking you, Chairman Hensarling, Ranking
Member Waters, Subcommittee Chairwoman Capito, and many other
members of this committee for the recent engagement with the
regulators on the unnecessary and potentially significant
losses on collateralized debt obligations secured primarily by
trust-preferred securities.
I would also like to thank Chairman Hensarling and
Chairwoman Capito for introducing H.R. 3819, which ABA strongly
supported, to provide relief to banks like mine which would
suffer considerable losses under the agency's rule. Your many
voices on the issue and sense of urgency to address unintended
negative consequences helped move the process forward to find a
satisfactory solution. This solution will help many community
banks like mine and, more importantly, the customers and
communities we serve.
ABA also applauds the regulatory agencies for moving
quickly to find a resolution to the problem. This is a very
good example of how the agencies should act when problems in a
rulemaking arise. With such a complicated rulemaking as the
implementation of the Volcker Rule, which totaled nearly 1,000
pages, inevitably there will be problems that were not
anticipated. If the regulators had not acted, the immediate
cost to my bank would have been over $1 million. For the
industry it would have been at least $600 million, with the
impact on communities many multiples of that.
Although this specific issue now appears to be resolved, it
is indicative of a much broader problem. Just as the Dodd-Frank
Act is the law of the land, so is the Volcker Rule. While we
have concerns with the aspects of the rule, our focus now is to
ensure that it be applied in a way consistent with its original
intention to address the systemic risk, not impose costs on
banks like mine unrelated to systemic issues.
We are very concerned that the agency's rule is so broad
that it has consequences far beyond what Congress intended and
will hurt legitimate investments that not only are safe and
sound choices for banks, but that support the credit
availability and financial service needs of our customers. As a
result of the agency's broad definition, many investments made
by banks of all sizes in CDOs, CLOs, collateralized mortgage
obligations, and venture capital investments will no longer be
allowed. These pooled products are essential to ensuring credit
reaches where it is needed most, as well as helping banks
manage and mitigate risk by diversifying their exposure to
borrowers. These are traditional banking assets, not the
trading instruments that Volcker was designed to capture.
There is a real irony in the fact that a rule designed to
prevent banks from taking losses on short-term assets will
instead force banks to sell long-term investments early, often
resulting in a market loss. The loss to banks will be the gain
of the less regulated nonbank sector which was complicit in the
problems that led to the financial crisis as they will have an
opportunity to buy assets with recovering values at discount
prices.
Finally, the rule also results in a compliance burden for
community banks despite agency statements to the contrary. It
is possible that community banks will need to put in place
compliance programs to ensure they do not inadvertently violate
the Volcker Rule. These compliance programs are costly and
time-consuming, taking away valuable resources that could
otherwise be used to serve local communities.
In conclusion, the Volcker Rule should not impair
traditional banking services that allow banks to meet the needs
of their customers, nor impose unnecessary costs on any bank,
particularly regional and community banks where no argument of
systemic risk can be justified. Congress should be vigilant in
ensuring that the rules are focused on the original intent to
reduce systemic risk and not used to hinder the traditional
business of banking, which is providing credit to customers.
Thank you for allowing me to appear before you today, and I
would be happy to answer questions during that time.
[The prepared statement of Mr. Funk can be found on page 86
of the appendix.]
Chairman Hensarling. Professor Johnson, you are now
recognized for 5 minutes.
STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF
ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF MANAGEMENT
Mr. Johnson. Thank you, Mr. Chairman.
I completely agree with what Mr. Funk said, which is that
the original intent of the Volcker Rule is to reduce systemic
risk. I am sure you all remember vividly the fall of 2008 when
very large banks and quasi-banks such as Citigroup, Morgan
Stanley, Merrill Lynch, and others suffered very large losses
because they made big proprietary bets. They engaged in
excessive risk-taking. They didn't always call it proprietary
trading, it is true. That perhaps reflected their
misunderstanding of the risks in which they were engaged. And
in September 2008, the Bush Administration came to Congress
asking for a bailout, not, I think, particularly a bailout
targeted at community banks, but a bailout targeted at some of
the largest firms on Wall Street.
Chairman Paul Volcker, I believe, correctly articulated
that we should limit the amount of risk-taking that can be
taken by what are now bank holding companies, very large bank
holding companies. I would stress the largest six or the
largest eight is the focus of attention here. They have FDIC
guarantees on their deposits. They also have some degree of
subsidy because they are perceived by many in the credit
markets to be too-big-to-fail. They should therefore, as a
matter of general prudence and a matter of systemic risk
reduction, be limited in the kind of proprietary bets they can
take, and that is exactly what the Volcker Rule was designed to
do. It has gone through a very long, involved process with an
enormous amount of industry input, and there is now a good
chance that the rule as proposed and as amended, including
yesterday, will serve that purpose.
I think, Mr. Chairman, you are exactly right to focus on
the job creators, on what has happened to jobs in the United
States. I am the former chief economist of the International
Monetary Fund, among other things. I worked on financial crises
around the world for more than 25 years. Unfortunately, the
experience we have had in this country over the past half
decade is very typical of what we have seen in lots of
different countries and situations. When the financial system
blows up, and when the biggest parts of any financial system
get it wrong in terms of understanding the risks, or in terms
of managing their positions, sometimes we call that proprietary
trading, and sometimes it has different names. It is the same
problem almost everywhere.
And the damage, you are absolutely right, Mr. Chairman, is
on the companies, it is on the community banks, it is on the
people who try to create jobs. That is why we have had this
deep, long-lasting recession from which it is hard to recover.
This is a typical experience of a finance-induced deep
recession, unfortunately.
I think when we look at the implementation of Dodd-Frank,
we should be careful with regard to unintended consequences. I
think the regulators came under appropriate pressure from both
Republicans and Democrats because of the TruPS CDO issue. They
responded in a way that I believe to be appropriate. I hope
that you will continue to watch on these same details.
However, I also recall that 2 years ago I appeared in a
hearing before this committee along with a number of other
witnesses, many of whom predicted dire consequences if the
Volcker Rule were to come anywhere near to becoming a reality.
Financial markets are forward-looking. As you know, we have
the rule. Some details no doubt remain to be fully clarified.
But we have the rule, and we have financial market reaction.
Have we seen the drying up of sovereign bond liquidity? Have we
seen big increases in spreads in the way that were predicted? I
don't believe so.
If we do see consequences, unintended consequences, of
course they should be addressed, and I think it is admirable
that you are holding this hearing and you are holding these
other hearings. That is exactly what we need, to look at the
consequences, intended and unintended.
In that context, I hope you also think again about business
development corporations, which reportedly are being considered
as a vehicle through which some of our largest bank holding
companies--at least one of them--could find their way again
into highly speculative proprietary betting type of business.
So that is not how they are currently used, but that is how
they could be used. Hopefully, we will have some discussion
also about CLOs in that context as well.
To conclude, the Volcker Rule has a good chance of reducing
systemic risk. It requires appropriate oversight from Congress.
I am encouraged that you are providing that oversight. It
requires the regulators to avoid and prevent the development of
new loopholes.
Thank you very much.
[The prepared statement of Professor Johnson can be found
on page 104 of the appendix.]
Chairman Hensarling. Mr. Ganz, you are now recognized for 5
minutes.
STATEMENT OF ELLIOT GANZ, EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL, THE LOAN SYNDICATIONS AND TRADING ASSOCIATION (LSTA)
Mr. Ganz. Thank you. Good morning, Chairman Hensarling,
Ranking Member Waters, and members of the committee. My name is
Elliot Ganz, and I am the general counsel of the The Loan
Syndications and Trading Association, or LSTA. The LSTA is an
association which represents the interests of the many
participants in the $3 trillion commercial loan market. We
thank you for the opportunity to testify at this timely
hearing.
My testimony will focus on how the Volcker Rule's
definition of ownership interest could negatively impact credit
availability for American companies by profoundly disrupting
the market for open-market collateralized loan obligations, or
CLOs. This disruption could lead to a significant reduction in
the amount of credit available to some of the most dynamic job-
creating companies in America and would result in material and
arbitrary losses to American banks which hold almost $70
billion of safe, well-performing CLO debt securities.
The best place to start is by describing what a CLO
actually is. A CLO is a securitization fund managed by an
independent SEC-registered investment adviser which issues
securities and then uses that money to provide loan financing
to American companies. CLOs finance approximately $300 billion
of these loans, representing almost half of all loans made by
nonbanks in the United States.
These loans are made to some of the most dynamic companies
in America, across all States and all industries, including
broadband, satellite, cellular, health and hospitals, energy,
airlines, automotive and retail. Who are these companies? They
include such iconic American companies as Sears, Aramark,
SuperValue Stores, Rite Aid, Good Year Tire, and Delta
Airlines, who together employ hundreds of thousands of
Americans. Hundreds of smaller companies also rely on CLO
financing, including Regal Cinemas, Armstrong World Industries,
ABC Supply, TempurPedic, and Quikrete . Just these five
companies alone employ almost 50,000 people.
Many of these smaller companies have no access to capital
markets other than through the loan market. In all, we estimate
that companies which access the CLO market for financing employ
more than 5 million people.
CLOs have performed remarkably well over the years,
including during and after the great financial crisis. Since
1996, cumulative realized losses to CLO debt securities has
been less than 1 percent.
Attracted by the safety and soundness of CLOs, their
historical performance, and their reasonable risk-adjusted
return, a wide range of U.S. banks currently invest almost $70
billion in the highest-rated debt securities. While a
significant amount of CLO debt securities are held by large
banks, they are also held by at least 30 other banks, including
21 with assets less than $25 billion, many of which are
community banks.
To be clear, banks are not buying CLO equity. These are the
highest-rated debt securities of CLOs. They have none of the
characteristics of equity and are simply not ownership
interests. Yet, the Volcker Rule artificially and arbitrarily
converts CLO debt securities into the equivalent of equity
through an expansive definition of ownership interests, thereby
making them prohibited to banks.
Because the ability to restructure $70 billion of these
securities is extremely challenging and the prospect highly
doubtful, banks will be forced to divest, putting downward
pressure on prices for CLO debt, thereby triggering further
selling pressures, leading to a cascade of falling prices,
despite the fact that these remain very high-performing, safe
assets.
The agencies yesterday provided limited relief to holders
of CDOs and trusts. This was a $600 million accounting loss
recognition problem. In contrast, if the price of CLO debt
securities were to drop by only 10 percent, banks holding them
would face potential capital losses of up to $7 billion, losses
that would be attributable solely to the imposition of the
final Volcker Rule. This furthers no regulatory objectives.
The good news is that there is an easy regulatory fix to
this problem. It requires no exemption or carve-out, simply
guidance from the agencies that the term ``ownership'' as
defined in the final rule does not cover CLO debt securities
that contain only a contingent right to remove or replace a
manager for cause, but contain none of the other indicia of
ownership listed in the definition. We believe that adoption by
the agencies of this simple proposal would allay the concerns
of the CLO market and we urge the involved agencies to issue
this guidance in the coming days so that CLOs can continue to
provide financing to American companies.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Ganz can be found on page 97
of the appendix.]
Chairman Hensarling. Mr. Robertson, you are now recognized
for 5 minutes.
STATEMENT OF DAVID C. ROBERTSON, PARTNER, TREASURY STRATEGIES,
INC., ON BEHALF OF THE U.S. CHAMBER OF COMMERCE
Mr. Robertson. Thank you, Chairman Hensarling, Ranking
Member Waters, and members of the committee. I am appearing on
behalf of the U.S. Chamber of Commerce. I participated in the
CFTC roundtable on the Volcker Rule, and my colleague, Anthony
Carfang, has testified before both House and Senate
subcommittees on the subject as well. I am here to represent
the perspectives and viewpoints of corporate treasurers.
In these forums, we have raised concerns regarding
unintended consequences the Volcker Rule could cause. These
include impaired market liquidity and reduced access to credit
and capital, higher costs and less certainty for borrowers,
potential competitive disadvantages for U.S. businesses and
financial institutions, increased compliance costs, higher bank
fees, a shifting of risk out of banks into other less well-
regulated sectors of economy, and capital flows into offshore
markets. The true effects of this mammoth regulation will not
be known until the conformance period ends; however, some
problems which impact both businesses and individuals are
coming into focus.
It is important to recognize that U.S. businesses benefit
from the most efficient capital markets in the world. Companies
doing business in the United States operate with roughly $2
trillion of cash reserves, and that represents only 11 percent
of U.S. GDP. In contrast, corporate cash in the eurozone is 20
percent of GDP, and in the U.K., the ratio is even higher at 32
percent.
Reduced access to capital or certainty of access will
require companies to hold more cash on their balance sheets,
slowing economic growth. And how will companies generate more
cash? Through layoffs, reducing dividend payouts that retirees
depend upon, and by forestalling capital expenditures which
fuel growth.
Mr. Ganz did an excellent job of noting the jeopardy that
the Volcker Rule places around collateralized loan obligations,
but this may be only the first wave of capital formation
problems that could arise.
It is also noted that harmonization of the rule is needed.
The Volcker Rule was written by five separate agencies, each
with different areas of responsibility and different tools,
histories, and processes for regulation and enforcement.
Capital investment by business requires a stable and
predictable regulatory environment. For the Volcker Rule to
work and support economic growth, it is critical that its
interpretation and enforcement be harmonized amongst all of the
regulators to provide clear rules of the road.
The real impacts of the Volcker Rule will not be known
until the end of the conformance period winds down; however, we
need to be particularly vigilant to its impact because
currently we are under a very unusual macroeconomic scenario
characterized by quantitative easing, which has pumped excess
liquidity into the economy. We fear that this quantitative
easing may actually mask the effects of the Volcker Rule for a
period of time, but the start of the wind-down of QE is under
way, and the potential has already boosted long-term rates.
The Volcker Rule will not be implemented in a vacuum. We
face a time of unprecedented regulatory change. Corporate
treasurers have to contend with looming money market
regulations that could imperil 40 percent of the commercial
paper market, Basel III lending requirements, Basel III
disincentives for commercial lines of credit, and the
implementation of derivatives regulations that could reduce the
ability of businesses to mitigate risk and ensure affordable
access to raw materials. All of these dynamics are converging
in one place, on the desktop of the corporate treasurer, and
their combined impact upon a business' ability to raise capital
and appropriately take on and manage risk has not been fully
vetted or thought through.
Lastly, I would like to draw attention to some rulemaking
process and procedural flaws that raise concerns about the
level of rigor that was conducted in crafting the regulations.
The process to create the regulations did not permit sufficient
dialogue. There was a comment period, but the nature of the
regulation was so far changed that a reproposal would have been
well in order. It also did not entail the required cost-benefit
analysis or an assessment by the SEC on its impact on capital
formation.
Accordingly, we would respectfully request that Congress
review the procedures for rule writing, especially with joint
agency rulemakings, to ensure fair procedures for input and
comment and hold agencies accountable in the consideration of
the impacts and the costs on the economy and businesses.
I appreciate the opportunity to appear before you today on
behalf of the U.S. Chamber of Commerce. The Chamber supports
the passage of H.R. 3819 and respectfully requests that the
bill be amended to include an exemption for CLOs.
Thank you. I look forward to answering your questions.
[The prepared statement of Mr. Robertson can be found on
page 111 of the appendix.]
Chairman Hensarling. The Chair now recognizes himself for 5
minutes for questions.
Mr. Robertson, I think I just heard you in your testimony
say that because of an aspect of the Volcker Rule, companies
may have to build up to $1 trillion of additional cash
reserves. Did I understand that correctly?
Mr. Robertson. That is correct.
Chairman Hensarling. I have to tell you, even by
congressional standards, that is a fairly staggering number.
I think I also heard you say that from your experience,
companies may have to downsize and lay off workers. You were
here for my opening statement. I am thinking about two
constituents I have, Claudia and Joseph, who are either
unemployed or underemployed. So elaborate how you come to the
conclusion that these companies may have to downsize and lay
off workers because of the Volcker Rule.
Mr. Robertson. Thank you.
One of the things that is a characteristic of our financial
market is very robust capital markets, very strong access to
commercial credit. So as a result, companies are able to
invest, they are able to support their working capital needs
through just-in-time financing. This allows them to run their
balance sheets very efficiently and direct their cash toward
working capital and investment.
The minute that companies begin to doubt the ability of the
market to provide financing for them or to manage financial
risk, they are going to need to insure themselves against that,
and that is going to require them to hold more cash, because
they won't know if they can get credit; and secondarily it is
going to require them to hold more cash to hedge financial
risks if they don't have access to derivatives and other
hedging tools that are used for their activities. Basically,
the comparison is between the United States with its robust
markets, and Europe and the U.K., which have less robust
markets.
Chairman Hensarling. Mr. Ganz, you spent a fair amount of
time in your testimony speaking of the CLO market. You also
have a fairly staggering number--I notice, on page 2 of your
testimony: ``In all we estimate that companies that access the
CLO market for financing employ more than 5 million people.''
How do you derive that statistic?
Mr. Ganz. We did a survey of all of the loans that were
held in CLOs, and then we tracked that against--we used a
service to track that against how many employees each of those
companies employed.
Chairman Hensarling. You also say in your testimony,
``Often these growing job-creating companies have no other
access to the capital markets other than through the loan
market,'' specifically speaking of the CLO market. How did you
come by that conclusion?
Mr. Ganz. The companies that borrow through CLOs are called
non-investment-grade companies. That means they have no
ratings, so they can't access the investment grade markets.
They can't access the regular bond market. Some of them can't
even access the high yield market, particularly the smaller
ones. So the only place they can get money is from the
leveraged loan market. That is an institutional market largely,
and CLOs provide 50 percent of the financing in that market. So
it is a very big deal. And, again, I think it is very important
to note most companies in America are noninvestment grade.
Chairman Hensarling. Like many other Members of Congress,
again, I have constituents who are unemployed, I have
constituents who are underemployed, and my guess is if I did a
survey, most have never heard of the Volcker Rule, most have
never heard of the collateralized loan obligation market. What
should I tell these constituents about why they should care
about the Volcker Rule?
Mr. Ganz. In this context, the expansion of one paragraph
in one small section of the Volcker Rule artificially converts
debt securities into equities and has a profound impact on the
banks that hold these. Those banks are going to have to divest
their securities. So besides the impact that it has on the CLO
market itself, the banks that hold those securities are going
to take an immediate capital hit. If they take an immediate
capital hit, they are going to have less money to lend into
those communities.
Three banks filed letters to the agencies, three smaller
banks with assets in the $20- to $35 billion range, and they
addressed that specifically. They have somewhere between $300
million in CLO notes up to about $1 billion, and if they have
to take a $30 million hit or more, that is going to be less
money available to lend into their communities.
Chairman Hensarling. Thank you. My time has expired.
The Chair now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you very much.
To Mr. Funk, and I think Mr. Johnson, and maybe others who
recognize that both sides of the aisle cooperated and worked to
make sure that the regulators quickly addressed the TruPS CDO
issue, and just as we were able to do that, I think that we are
able to work with regulators on some of the other issues that
are being identified, such as the CLO issue. And I think that
we should be focused more on what we can do to implement
Volcker, because it is the law, but at the same time deal with
any unintended consequences. And since we have already
demonstrated that we are willing to do that, and the regulators
are showing that they are willing to respond, let us focus on
what we can do to make sure that we deal with some of the other
issues with which you are concerned.
For example, CLO. Let us take the CLO issue, Mr. Robertson.
You have identified this as a real concern. Have you thought
about ways in which the regulators can address these concerns,
and are you willing to work with us to address these concerns?
Mr. Robertson. Yes, absolutely. And I think actually Mr.
Ganz outlined clarifying that CLOs were not meant to be
captured under the rule that was trying to catch hedge funds.
So clarifying that these are debt securities, not equity
securities, they are not deemed to have an ownership interest
in equity.
Ms. Waters. Are you willing to work with us in the way we
just demonstrated we can work on unintended consequences?
Mr. Robertson. Oh, absolutely.
Ms. Waters. Mr. Johnson, a number of comments have been
made about compliance, and, of course, Mr. Funk, we are
concerned about any costs that are caused by compliance, and we
want to make sure that we do everything that we possibly can to
assist you with compliance without costing a lot of money to
the bank. How can we do this, Mr. Johnson? Do you have any
thoughts on that?
Mr. Johnson. Congresswoman, I understand that the
regulators are addressing this. It is a live issue. I am not
sure it is completely resolved. But incorporating a relatively
minor compliance requirement within the existing reporting and
supervision for community banks, I think that is--I am not
saying it is trivial, but that is not adding a big additional
burden. I think that makes sense.
This rule is not targeted at the community banks. There are
some spillovers that you are identifying in this discussion.
But I think you can incorporate it within the existing
supervisory framework.
If I could just add a point on the CLOs, Mr. Ganz has a
very straightforward proposal, which is an FAQ issued by the
regulators; not even a new rule or clarification, just a
frequently asked question and the answer to such a question.
And I think he puts his finger in his written testimony, which
I have only looked at quickly, on the key issue, which is the
banks can make loans, that is what banks do, but they can't
take an equity interest in certain investments to the degree
they used to. So that is what--in his written testimony Mr.
Ganz is differentiating that quite carefully. And I think,
again, these are sensible ideas that you can absolutely work on
with the regulators.
Ms. Waters. Mr. Funk, in terms of compliance, do you
believe that we can work with you to reduce costs to the
community banks for compliance efforts?
Mr. Funk. Absolutely.
And I will say, just to give you an example with regard to
the Volcker Rule, I represent a community bank and I didn't pay
much attention to the Volcker Rule until about December 10th.
It was then when I found out that we were going to have to take
a million-dollar charge. And that is why we are so appreciative
for both sides of the aisle taking a stand on this, because we
had to have this resolved. We have left our books open.
Normally, we close our books on the 3rd or 4th day of the
month. We had to leave them open, but were finally able to
close them today because of the announcement from the
regulators. So, thank you so much for your help on that.
Ms. Waters. You are so welcome.
Mr. Bentsen, you have worked in this House, and you have
seen efforts for cooperation from both sides of the aisle, and
you have seen times when we have not cooperated. And so, given
what you are looking at now, based on the work that both sides
of the aisle did recently, don't you think that we can resolve
some of these concerns, these unintended consequences, without
going at destroying the Volcker Rule?
Mr. Bentsen. Congresswoman, absolutely. I think what
happened with the trust preferreds was very positive, but I
think it is indicative of problems in the underlying rule
itself. It is very complex. The CLO issue has arisen. There are
going to be others that are coming going to come up. The
coordination issue is huge, and Congress absolutely has a role
to play.
The law belongs to Congress. It is the regulator's job to
implement it, but Congress has a role to oversee the law and
make sure it is done appropriately.
Chairman Hensarling. The time of the gentlelady--
Ms. Waters. I yield back.
Chairman Hensarling. --has expired.
The Chair now recognizes the gentleman from New Jersey, the
Chair of our Capital Markets Subcommittee, Mr. Garrett, for 5
minutes.
Mr. Garrett. And, again, I thank the chairman.
I will start down at this end of the panel.
Congressman Bentsen, good morning. As you may know, SEC
Commissioner Mike Piwowar has stated that, ``rulemaking
agencies failed both at the proposing and adopting stages to
prepare an economic or other regulatory analysis of the Volcker
Rule. As a result, we do not know what the rule's economic
impact will be or whether other alternatives might have
accomplished the goals of the rulemaking at a lower cost with
less disruption of the capital markets.''
So my first question is, do you agree with his statement
that they failed to abide by the law, by the Administrative
Procedures Act (APA), and to do a robust economic analysis and
find out if there are other alternatives out there?
Mr. Bentsen. Congressman, I won't opine with respect to the
APA, but I will say that--first of all, we called for a robust
economic analysis in our comment letter. We thought that was
entirely appropriate. As you know--
Mr. Garrett. You did?
Mr. Bentsen. --the APA applies--
Mr. Garrett. You did call for that?
Mr. Bentsen. Yes.
As you know, the APA applies differently to different
agencies. And, in particular, the prudential regulators do not
have the same burden that the independent agencies--and
certainly they don't have the same burden that other Executive
Branch agencies have. So, that is actually a role that Congress
should probably take a look at going forward.
Mr. Garrett. So, regardless of what the APA may say, it is
your opinion, I guess is what you are saying, that an economic
analysis, and a robust one, should have been done in this
situation.
Mr. Bentsen. We believe so, yes.
Mr. Garrett. Okay. Great. Thanks.
Running down to Professor Johnson, I was reading through
your testimony last night and watching the Senate hearing of
your testimony last week. In both cases, you repeatedly stated,
as you did this morning, that the impacts of the rules are
overstated. Specifically, you state, ``Financial markets are
typically forward-looking--you just said that this morning--so
the expected future effects of any such rule are likely to be
felt in advance of full implementation, yet none of these
negative consequences has actually transpired.'' And you just
said that this morning.
But if I go down to the end of the table to Mr. Robertson,
you said in your testimony, in written testimony and what you
said just now, ``Because of the 18-month conformance period, it
is not possible to understand the full impact of the Volcker
Rule, particularly on Main Street businesses, until the rule is
completely implemented and operational at the financial
institutions.''
And you also said--and I thought it was an astute point--
both in your written testimony and right now, that the QE,
quantitative easing, and the extraordinary impact that has had
on the bond market is also significant.
So I will bring it back to Professor Johnson. I am sure you
are familiar, being an academic, with the portfolio balance
channel theory--and this is something that Ben Bernanke has
talked about in the past--which basically says, as you do QE,
what does that do? It affects the price--it affects the price
going up; the yields are going down. And what does that do to
the marketplace? People have to go into the marketplace to try
to find similarly situated risk that they could have had but
for the fact of QE. And that essentially means that bond
investors would have to go further out on the credit-risk curve
to buy corporate bonds.
That is what the effect has been in the corporate bond
market because of QE, right? And I see Mr. Robertson nodding to
that.
So aren't you missing the mark when you say that we can
look to current activity in the marketplace if we fail to
consider what the effect is of QE today, and if we fail to
consider the fact that tapering will occur in the future and
the combined effect of those on the bond market?
Mr. Johnson. No, Congressman, I don't--
Mr. Garrett. Why not?
Mr. Johnson. --believe I am missing the point. If you look
at the testimony that was provided at the previous hearing
before this committee--for example--
Mr. Garrett. I did.
Mr. Johnson. --I testified before the CFTC hearing, and one
of Mr. Robertson's colleagues was there. There was plenty of
talk about immediate consequences, for example, on sovereign
yields in Europe and on risk spreads. And it is not clear that
QE would affect all the risk spreads in the way that you are
indicating.
Now, it is true we have a particular set of monetary
policies right now in this country. It is also true the Federal
Reserve has exerted a lot of control over dimensions of the
credit conditions, and they may well continue to want to do
that going forward. I agree that those things are interacting.
But my point is, in terms of the predicted consequences, in
terms of the concrete, actual things that have changed, not Mr.
Robertson's conjectures about what might change in the future,
what have we actually seen change in a negative way? And that
is my point, Congressman.
Mr. Garrett. That is my point, that you are looking at what
is happening today, but you cannot push that to the future
because in the future we will not have the QE. The QE, under
this theory and under--I think most people agree that it has
had an effect on price and yield and has pushed the market out
into this area. So you can't say that what is going to occur
today is going to be in the future.
My time is almost up, and, gosh, I was going to give Mr.
Robertson the last word, but I see the chairman is quick with
the gavel, as always.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Robertson, you mentioned that U.S. companies will need
to raise an additional $1 trillion to comply with the Volcker
Rule, yet hedging for ordinary business operations is exempt. I
just would like to know how you calculated this figure?
Mr. Robertson. First of all, I wouldn't claim that they
would have to raise $1 trillion. What I was trying to
distinguish was the level of cash that U.S. businesses hold on
their balance sheets to support the economy and contrast that
with the U.K. and the European Union, which have less robust
capital markets.
What we have done is we have compared the cash holdings
published by the Federal Reserve to GDP to those published by
the Bank of England, and the European Central Bank, and noted
the lower level of cash proportional to the economy that U.S.
corporations hold.
And so our concern is, we know from our experience in
working with corporate treasurers that one of the reasons why
they don't have to hold that much cash is the efficiency of the
system, the reliability of access to capital. We are not
stating it will be $1 trillion, but our concern is that
anything which reduces that efficiency could force U.S.
businesses to hold more cash.
Ms. Velazquez. Professor Johnson, would you like to
comment?
Mr. Johnson. It is a fascinating calculation Mr. Robertson
is presenting, but I don't see that it has any basis in fact
whatsoever, in the sense of what is the impact on the
efficiency of the financial market, of the Volcker Rule. I am
sorry that Mr. Garrett has left the room, but this is exactly
the point.
If there were a disruption to the financial markets, if it
were becoming harder to access credit, if corporate treasurers
were fearing their access to short-term financing, those would
be legitimate concerns, but we would see them now. The markets
would already be disrupted.
And that is what previous fellow witnesses have testified
to; they said the effects are coming now, right away,
immediately, because the financial markets are forward-looking.
Where do we see this disruption concretely for corporate
treasurers?
Ms. Velazquez. Professor Johnson, is there any Volcker Rule
comparison in Europe at this point?
Mr. Johnson. There is plenty of discussion in Europe about
finding ways to separate commercial banking, the utility-type
commercial banking, from relatively risk-taking investment
banking.
The very latest moves--but I would caution that the
Europeans go back and forth on this--is to move towards more of
a Volcker-type approach, limits on proprietary trading, away
from the so-called ring-fencing or the separation of
activities.
But the European policy is not completely settled. And I
would certainly not wait for the Europeans to sort out their
banking system, which is an enormous mess, supported by massive
government subsidies. You really do not want to go to what the
Europeans have.
Ms. Velazquez. So, Professor, there is no rule in Europe at
this point that is costing $1 trillion to Europeans?
Mr. Johnson. There isn't a--they are not holding more cash
because of some impact of an equivalent to the Volcker Rule,
that is correct.
Ms. Velazquez. Professor, Dodd-Frank provided the financial
industry with a number of exemptions to the Volcker Rule,
understanding that most trading was for legitimate business
purposes such as helping small businesses hedge risk. And yet,
some industry participants continue to argue that the Volcker
Rule will negatively impact access to capital for small
businesses.
Have you seen any report, any evidence, any statistics, any
report to that matter?
Mr. Johnson. No, Congresswoman, I haven't. I have not seen
credible independent analysis to that point.
I think it is a very important point, but remember, the
Volcker Rule is targeted at the largest six or eight bank
holding companies. We have big, liquid, deep markets. Mr.
Robertson is absolutely correct on that. Those markets have not
been disrupted by what we have seen so far. And given the
trajectory which is implied by the latest rule clarification,
including yesterday's, I don't think we are going to see that
disruption.
Ms. Velazquez. Thank you.
Mr. Funk, there has been a lot of discussion recently about
the treatment of TruPS CDOs under the Volcker Rule. However,
the fact remains that these are risky assets which could
undermine the safety and security of the small pool of banks
that hold them.
If not 2 years, as drafted, what is a reasonable amount of
time to divest these assets, given the demonstrated poor
performance of these TruPS CDOs?
Mr. Funk. These were debt securities when we bought them,
not equity securities. And when we bought them, they were
investment-grade, they were not what we would consider in our
bank to be a risky asset.
We have written them down. We bought $9.7 million. We wrote
them down to about $1.7 million. We, in 2008, charged off $8
million, so our holding value is $1.7 million.
I think the key thing, Congresswoman, is on this particular
point, if we hold these for another 10 or 12 years, we are
almost certain we will recover more than our book value. We
have plenty of capital in our bank, we are able to hold them,
but the rule as it was proposed would have required us to take
a hit right now--
Ms. Velazquez. So what is a reasonable time?
Chairman Hensarling. The time--
Ms. Velazquez. That is my question.
Chairman Hensarling. --of the gentlelady has expired.
The Chair now recognizes the gentlelady from West Virginia,
the Chair of our Financial Institutions Subcommittee, Mrs.
Capito, for 5 minutes.
Mrs. Capito. Thank you, Mr. Chairman.
I would like to follow up, Mr. Funk, where you left off.
You have already written down--let's start, when you first
purchased these securities, they were not considered risky
investments and were really--the reason they took such a dive
was as a part of the recession, the financial crisis. Is that
correct?
Mr. Funk. That is correct.
And what I will tell you is in our bank in Iowa City, when
we bought these in 2005 or 2006, there was a lot of discussion.
We decided to limit it to $10 million. We wound up with $9.7
million. As I recall, they were all rated either A or A1 by
Moody's, and they were investment-grade. They survived bank
examinations, and they were not considered a risky asset. But,
like many things, they were a casualty of the recession.
Mrs. Capito. Right. And you are still receiving revenue
from this. This was part of the reason that you purchased
these, correct?
Mr. Funk. They are not--we will receive revenue. We are not
right now. But the way the pools work is that as the banks
continue to pay, eventually you get revenue. Our particular
class that we hold is not getting cash right now.
Mrs. Capito. It is not a revenue--
Mr. Funk. But we are very confident that in the next 10,
12, 15 years, we will recover all of our book value and then
some, perhaps.
Mrs. Capito. Okay.
I would like to ask a question on two things, quickly. I
have been working with Mr. Meeks on some legislation to say, if
we are going to move new regulations forward, understanding
that regulations have to move with the time and the instruments
and what is moving on, I get that, but what are we going to do
about the old, existing, antiquated, no-longer-useful-but-
still-must-be-complied-with regulations?
And we are working on a scenario where we would say to the
regulators, before you move forward with something that is
complicated, like the Volcker Rule, you have to look at where
the existing regulations are right now, and are they useful,
are they compatible, or would it be better to move in the new
while you are taking out the old?
Does anybody have a sense that kind of exercise took place
during the enactment of this rule?
I will start with you, Mr. Funk, then anybody else.
Mr. Funk. That I don't know. What I do know, and I think it
has been said elsewhere, and is something that really concerns
me, is that our particular bank is subject to the regulation of
three entities: the SEC; the Federal Reserve for our holding
company; and the FDIC for our bank. And the way the Volcker
Rule is written, they can all enforce the Volcker Rule
differently, and I think that creates a lot of confusion. So we
do need more uniformity. But I certainly agree with the intent
of your question.
Mrs. Capito. Mr. Bentsen?
Mr. Bentsen. Congresswoman, first of all, I think that is
an outstanding idea, and I don't think it is limited to the
Volcker Rule or limited to--
Mrs. Capito. Right.
Mr. Bentsen. --the potential regulators. I would argue you
could add FINRA to that and what is going on with the
consolidated audit trail and the Order Audit Trail System
(OATS) that exists today.
So we don't want to build redundant regulation or redundant
systems. And we have seen--and I think this is an example in
Volcker, dealing with the trust preferred issue, where you
basically had legal definitions conflicting with the accounting
rules, where apparently no one was talking to one another to
figure out what was going on. And we are going to find more of
that. This is too big of a rule that we won't.
Mrs. Capito. Right.
Mr. Bentsen. And I think we will see that in the capital
standards, as well, where we are laying Basel III on top of
Basel 2.5 on top of Basel II. And, again, we know that there
will be conflicts in there.
Mrs. Capito. Yes, Professor?
Mr. Johnson. Congresswoman, I think you are making a very
good point. But part of the point of the comment procedures and
process was exactly to let the industry speak to any kind of
issue, including problematic legacy issues.
Now, the TruPS CDOs didn't come up, and that was
unfortunate--
Mrs. Capito. It wasn't in the rule.
Mr. Johnson. No, I understand. And as I said, that was
unfortunate, and has been addressed in, I would suggest, record
time by the regulators, because you all agreed this was a
problem.
I think that the right way to do this is exactly to have a
long period of time--we have had 3\1/2\ years of comments and
back-and-forth with the industry. If you can find additional
legacy, leftover problematic issues, absolutely, you should go
after them with Mr. Meeks--
Mrs. Capito. Right.
Mr. Johnson. --but there has been a very detailed process
already.
Mrs. Capito. Thank you.
And I guess my question concerns the next step. Does
anybody on the panel have a sense that it actually occurred?
Mr. Robertson?
Mr. Robertson. I don't have a sense it occurred. I know
there was a mandate for the regulators to coordinate. But just
given the scope of the effort and the amount of time that took
place, as you point out, there was no re-proposal. And I think
there needs to be much closer working around these regulations
with the various constituencies to surface these issues. It is
great to address unintended consequences after the fact, but,
at that point, there is a lot of disruption already created.
Mrs. Capito. Right.
The other issue--I will just make a comment, because I
don't have time for another question, really--is what you are
all talking about, the complexity of what we are dealing with
here. And I think that is not just a burden in terms of trying
to figure it out, but it has a financial burden that is
attached to it, too, that does translate to Main Street.
And so I say good luck to all of us for figuring out the
complexity of this rule and seeing the ramifications as we move
through this.
Thank you so much.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, the ranking member of our Capital
Markets Subcommittee, Mrs. Maloney, for 5 minutes.
Mrs. Maloney. I want to thank the chairman for recognizing
me, and thank the ranking member, and thank all of you for your
important testimony and for being here today.
We all know that the problem of the crisis, the financial
crisis, was not caused by community banks or regional banks or
credit unions. And many of us on this panel are working very
hard to shield them from unnecessary regulation.
But we know from many books and from the GAO report that I
have with me that proprietary trading was a cause, and, in
fact, in this report they call it a leading cause, of the
financial crisis. We know it was the CDOs; we know that it was
certain bad lending practices. And this Volcker Rule takes care
of this problem. So we need to put it behind us and go forward.
Now, if there is something that needs to be adjusted, such
as the trust-preferred CDOs--which, according to testimony, the
rule that came out from the regulators, the adjustment, takes
care of the challenge. Is that correct?
Mr. Funk. As far as I know, it takes care of the vast,
vast, vast majority of banks in America.
Mrs. Maloney. Then, if there are unforeseen consequences,
let's take care of them, but let's go forward. The Volcker Rule
is here. It is going to stay. It is now part of the fabric of
our country.
But one area that was raised in your comment letter, Mr.
Bentsen, you said that the proposed rule--and this may be an
adjustment that needs to take place. Your organization raised
serious concerns with the definition of a banking entity, which
you argued was far too broad. Does the final rule address your
organization's concerns on this issue?
And if it doesn't, how would you propose fixing this
problem? Is it possible that the final rule will sweep in
purely nonfinancial operating companies because of this broad
definition?
That was in your comment letter.
Mr. Bentsen. Sure.
As we have been going through it, it does appear that the
regulators did narrow the definition of ``banking entity'' and
they narrowed the definition of ``covered funds.'' However, I
will give you one example that is causing a great deal of
concern.
In ``covered funds,'' registered investment companies, what
we would think of as mutual funds, retail mutual funds were
explicitly exempted where they had not been in the proposed
rule. However, they are not exempted under the definition of
``banking entity.'' So, in effect, you already have a conflict
now where, on the one hand, mutual funds are not treated as
covered funds under the funds section, but they are captured by
way of being defined as a banking entity if they are affiliated
with a bank, which many mutual funds are.
So, again--
Mrs. Maloney. It just seems like it could be an issue which
could be handled by the regulators. And if a nonfinancial
subsidiary doesn't do any proprietary trading or investing, why
should anyone have to worry about it?
Mr. Bentsen. I think what it is indicative of--a couple of
points of what it is indicative of, is the broadness and
complexity of this rule and the fact that today it is trust
preferreds, tomorrow it is CLOs, the next day it is 1940 Act
registered funds, that we are going to find these things going
through. And it is going to take a lot of work, hence the
reason for Congress to continue to play a very active role in
this process.
The second point--and I want to respond to Professor
Johnson--is that regardless of what everyone thinks the intent
was or wasn't, this rule, by practice and by the way it is
written, has an extremely broad impact. It doesn't just affect
the top five largest institutions; it affects any banking
institution that has--anybody who is affiliated with a banking
institution. So it has a very broad impact. And the rule is
written as such to indicate that it has that broad reach.
Mrs. Maloney. If an affiliate isn't doing proprietary
trading, then it wouldn't affect them.
Mr. Bentsen. But, Congresswoman, with all due respect--
Mrs. Maloney. I would say that this panel--certainly many
of my colleagues and I, if there is any adjustment that needs
to take place, we will be a strong voice in helping that
adjustment and certainly shielding community banks and regional
banks and credit unions that did not cause the crisis.
I have one other question. Mr. Volcker, in his written
statements--and I would like to put his statement in the
record. I thought it was excellent.
Chairman Hensarling. Without objection, it is so ordered.
Mrs. Maloney. He said that the rule will change--and I am
quoting from his statement--the tone at the top, because it
requires CEOs to certify that they have adequate compliance
procedures in place.
And I would like to ask anyone to comment. Do you think
that--okay, Mr. Ganz, would you comment on if you think that
will be--and Mr. Robertson?
Mr. Ganz and Mr. Robertson and Mr. Johnson, you all had
your hands up.
Chairman Hensarling. Very quickly, because the time of the
gentlelady has expired.
Mr. Robertson. I think that is a basic fiduciary duty of
any bank CEO, to fully comply with all the regulations and also
to appropriately manage risk.
Chairman Hensarling. The time of the gentlelady has--
Mr. Bachus. Mr. Bentsen was also trying to respond to her
question about whether community banks will be affected.
Chairman Hensarling. I understand that, but the time of the
gentlelady has expired.
And the chairman emeritus happens to be next in the queue,
so the Chair now recognizes the gentleman from Alabama, our
chairman emeritus, for 5 minutes.
Mr. Bachus. I will answer like Mr. Bentsen would say. The
community banks are affected.
Mr. Bentsen. Congressman, I would just say, and in response
to Congresswoman Maloney, the point is that all of these banks
are captured, and it is not a question of whether they are
doing something that is prohibited. It is the fact that they
are subject to the compliance requirement on what they are
allowed to do as Congress intended in the statute, but they
have to go through all of these hoops of this new compliance
regime to do what Congress said they could do under the
statute.
Mr. Bachus. Thank you.
And could I get that put back on my time? That was in
response to her question. But it needed to be said.
Chairman Hensarling. I am afraid not.
Mr. Bachus. Thank you.
In Mrs. Maloney's opening statement, she again talked about
how proprietary trading was central to the financial crisis.
Professor Johnson, I think you sort of agreed with that. She
quoted a GAO report that she says claims that it was central,
but if you read it, it says it wasn't central, it says it
wasn't a cause of the financial crisis. So, I am going to
introduce that.
This whole Volcker Rule is a response to the financial
crisis, because people keep saying that it was caused by
proprietary trading.
Professor Johnson, you talked about mortgage-backed
securities, and you said that was proprietary trading. But, it
is not. The regulators encouraged the banks to hold mortgage-
backed securities long-term. That wasn't proprietary trading.
None of the five banks--really, the banks didn't fail
because of proprietary trading. Even Paul Volcker said--and I
will quote him, ``Proprietary trading in commercial banks was
not central to the crisis.'' Secretary Geithner said, ``If you
look at the financial crisis, it did not come from proprietary
trading activities.'' Even Raj Date of the Consumer Financial
Protection Bureau--he was the deputy--was for Dodd-Frank. He
said, similar to what Mr. Bentsen said, ``The Volcker Rule is a
solution to a non-problem.''
Professor Johnson, you are the Democratic witness. I think
what you are responding to is too-big-to-fail. I think that is
why you want the Volcker Rule. Am I correct?
Mr. Johnson. Too-big-to-fail is a very important and
persistent problem, Congressman, but irrespective of the
approach that you prefer to tackle it, I would still recommend
some version of the Volcker Rule.
Mr. Bachus. Why? If a bank--if they trade and lose money,
should the government prohibit that if there is no taxpayer
interest?
Mr. Johnson. If a small trading house takes speculative
proprietary bets and loses and goes out of business, I think
that should hopefully be of no concern to any of us. But it
does interact with size, scale, complexity, and systemic
consequences, some of which we can anticipate and some of which
catch us unawares every time. So it is that systemic impact
that creates the implicit government support, including the
support from this and previous Congresses.
Mr. Bachus. I think that is what you are afraid of. I think
you are afraid that they are still too-big-to-fail, even though
the Administration--you and I agree that Dodd-Frank didn't end
too-big-to-fail. You can still have systemic risk.
But I think what you really want to do, and tell me if I am
wrong, is you want to break up these big megabanks. Am I
correct?
Mr. Johnson. Congressman, if you were willing to make them
small enough and simple enough so they could all fail, and go
through bankruptcy without causing any systemic consequences,
then, yes, I would say, let them get on and run their
businesses--
Mr. Bachus. And I believe that is your motivation, is you
want to break these banks up.
And let me say this. I have 20 seconds. The problem I see
with that is we are in a global economy and they are global
megabanks, aren't they?
Mr. Johnson. There are some highly subsidized socialized
banks coming from other countries. That doesn't mean we should
emulate--
Mr. Bachus. But, they are global.
Mr. Johnson. There are some global banks--
Mr. Bachus. And they can move their proprietary trading
somewhere else, and we can't prevent that.
Mr. Johnson. If they move it outside of where it causes
problems for our economy, perhaps we shouldn't be concerned.
But if it is a bank like JPMorgan Chase, it is going to lose--
Mr. Bachus. But no other country has adopted the Volcker
Rule.
Mr. Johnson. If they are going to lose big in London,
Congressman, and that is going to affect the bank holding
company in the United States, then we have to worry about--
Chairman Hensarling. The time--
Mr. Bachus. You are a British American. Britain has not
passed a Volcker Rule, nor any other country, and they are not
going to.
Chairman Hensarling. --of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
I want to thank the panel for their testimony.
I have to be honest. This stuff, for me, I kind of always
feel like I am up to my nose in it, because it is tough stuff.
It might be easy for all you guys; you are all a lot smarter
than I am. I have spent most of the week trying to figure out
how many points I can get out of Ed Perlmutter for the
Patriots-Broncos game. That is about as complex as I can get.
And it is kind of interesting, when I hear the complaints
about a complex rule, it presumes that CBOs and CLOs and CDO
TruPS and CDO squares are simple. They are some of the most
complicated financial instruments in the history of mankind,
and you expect simple rules to kind of keep them in check. I
don't get it. You have a complicated, difficult, always
advancing, always changing financial services market. You are
going have to have complex rules to try to catch up--never get
ahead, but just to catch up.
And, honestly, it would help me a lot if anybody ever came
to talk to me about a complex rule who didn't always come to me
to complain about any rule. I would love to be here at a panel
with people subject to regulations, who told me, ``That is a
fair and reasonable regulation.'' I have never heard that in
the 14 years I have been here.
So I will, kind of, start off with difficult stuff to
comprehend.
Mr. Robertson, your $1 trillion number, it is a big number,
a scary number, but I have some other numbers. GAO says that
the financial crisis wiped out $9 trillion of assets. GAO says
that it reduced economic output by $12 trillion. The TARP that
we passed was just short of a trillion dollars. The Federal
Reserve increased its balance sheet by a trillion and a half.
All total, that is $23.2 trillion that were either lost or put
on the line because we didn't have sufficient regulations at
the time.
Now, I don't know about anybody else, but my concern is
that we have adequate regulations going forward. I totally
agree, and I have been saying from day one, this regulation,
all regulation--I know that the other side likes to pretend
that we are all for overregulation. That is my platform: I am
here to kill business because I hate jobs. That is ridiculous.
We are looking for balanced regulation, and not for the
normal players but to try to somehow cow the outliers. Now,
whether this particular regulation hits the mark or not will
tell over time, and if it doesn't, we will amend it, like it
has already been amended even before it is implemented.
Mr. Bentsen, you pointed out some very interesting comments
that might be of concern to me as I check them out. And if they
work out, if I agree with them, which I tend to on their face,
I will try to help you address those. Those are fair points.
But for me, it is really only about one thing. As I see it,
the whole crisis was caused because we had the financial
institutions, the biggest ones, taking risk that they had
insufficient capital reserves to cover. That is the bottom
line. I don't care that somebody is gambling their own money,
and if they lose it--but when they do it in a way that then
puts my mother's pension at risk, that is a problem, and we
have to do something about it.
So, yes, is it any surprise, is it wrong that we are asking
some of the people who were making some of the riskiest bets to
increase their capital reserve? Now, whether $1 trillion is the
right number, that is a fair question.
Mr. Robertson, do you think that we should actually ask
anyone to have any capital reserve ever?
Mr. Robertson. Absolutely.
Mr. Capuano. So now the question is, how much?
Mr. Robertson. Exactly.
Mr. Capuano. And that is a fair question. Is $1 trillion
too much? Maybe. What is the right number? Half a trillion?
$700 million? I don't know. But that is what we are here for,
to try to get it right.
The one thing I know without question, without doubt,
without debate is that it was insufficient in 2008. Does anyone
disagree with that? Do you think that we had sufficient capital
requirements in 2008? Because if you do, please raise your
hands, because I would like to hear more.
So we all agree that they were insufficient and we have to
increase them. How much? Anybody here have the answer? Because
if you do, I want to hear it. I am not sure.
Mr. Johnson. Congressman, I think they should be increased
by much more than currently proposed.
Andrew Haldane of the Bank of England recently said that
the way to think about capital on a global basis in the largest
financial institutions is that they were--capital requirements
on a leveraged basis were between 1 and 2 percent. So you could
be 98 percent leveraged, 98 percent debt or more. Now, under
this Basel III agreement as applied in the United States, we
will get slightly over 3 percent capital requirement, so you
can be nearly 97 percent debt.
I don't think that is enough to withstand the kinds of
risks that you are identifying.
Mr. Capuano. So I should continue being nervous, which I
guess I am.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, the
Chair of our Housing and Insurance Subcommittee, Mr.
Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. And I appreciate
the panel being here.
I think my biggest concern, whether it is the Volcker Rule
or all of these regulations is, one, the lack of cost-benefit
analysis that has been done. Because ultimately, who is going
to pay for these increased costs are the people who are at the
bottom of the chain here, and that is the customers of, for
example, Mr. Funk's bank.
Mr. Funk, how long have you been in banking?
Mr. Funk. Excuse me?
Mr. Neugebauer. How long have you been in banking?
Mr. Funk. This is my 34th year.
Mr. Neugebauer. Yes. It has changed a little bit in 34
years, hasn't it?
Mr. Funk. That is a fair statement.
Mr. Neugebauer. Yes. I have been a banker, and I have been
a borrower, and over the years, how I did financial
transactions changed a lot.
And one of the things that I was concerned about is that as
your bank has grown, you have had customers grow, as well. And,
at some point in time, those customers grow to the point where
you are maybe not able to handle all of their financial needs.
And so, then, if you are doing your job, and I am sure you
are, your job is to create ways to--free up ways to continue to
lend to them or make sure that your customers' credit needs are
fulfilled. Is that correct?
Mr. Funk. That is correct. And what we usually try to do in
those instances is bring other community banks into the group
and satisfy them, and these customers still remain our
customers.
Mr. Neugebauer. And, in some cases, you can free up capital
in your bank by taking advantage of some of the products, for
example, that Mr. Ganz has been talking about, where
securitizing, say, auto loans or packaging some commercial
loans, whether you are doing it by bank participation or by
securitizing those. Is that correct?
Mr. Funk. That is correct.
Mr. Neugebauer. Yes. I think the question that I have is,
based on your initial blush of looking at how all of the
capital markets are--because the direct lending from banks to
businesses is actually declining. So how do you see the Volcker
Rule impacting your ability in the future to be able to be
creative with some of your customers?
Mr. Funk. I think that is a great question. And I think, to
go back to the point that before December 10th I didn't pay
much attention to the Volcker Rule because I was told it didn't
affect community banks, we understand the Volcker Rule is the
law. We understand that it was designed to reduce or eliminate
proprietary trading for systemically important banks. There is
no way you could make an argument that MidWestOne Bank in Iowa
City is systemically important, and yet we have seen the
effects over the last 30 days, and it wasn't been too pleasant
for some of our people and our board as we have tried to
grapple with the new rule.
And, again, we thank you for all the support in getting
that changed. It is fair to say that things usually don't get
changed that quickly. So the fact that you were willing to
weigh in is very good, but what happens the next time if we
can't get a decision that quickly and we have to recognize
those losses? So it is the unknown, Congressman.
Mr. Neugebauer. Thank you.
Mr. Bentsen, one of the things that allows financial
institutions to do some of the kinds of lending that they do
today is being able to hedge some of those risks and to balance
the risks that they are taking as a financial institution.
And I think you kind of alluded to the fact that this
Volcker Rule could impact the banks' ability to really actually
effectively manage their risk, which is kind of
counterproductive to what, hopefully, regulation is about.
Regulation is about stabilizing the ability of a financial
institution to manage their risk so that they are not
systemically risky.
But in many cases, if we are going to limit their ability,
won't that have an impact on them?
Mr. Bentsen. That is a good point, Congressman. Time will
tell. And, I think some time ago there were five or six
regulators sitting at this table who were talking about the
importance of hedging as a risk-mitigating regulatory tool. And
I think the regulators certainly had that in mind when they
were trying to write this rule.
And to Professor Johnson's point, the proposed rule that we
dealt with was one thing, and we had to look at that as to what
that might be as a final rule. We now have a new rule with 900-
plus pages and then we try to interpret that.
So time will tell as the conformance period ends, firms
begin to implement, and they understand what the compliance
rules are, their compliance and enforcement liability. Then I
think we will see the impact as it relates to hedging, market-
making, and other permitted activities.
Mr. Neugebauer. But I think we can all agree that because
of this new rule, pricing will have to be put in place for the
regulatory risk of whether you are in compliance are not and
all of the steps--
Mr. Bentsen. It won't be free, you are right.
Mr. Neugebauer. Yes.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch, for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
I want to again thank the panelists for your help with
doing our work.
And I do agree, the specifics of this rule are complex, but
I think at its core is a very simple idea, that banks of any
size should not be allowed to use taxpayer-backed support to
make risky or reckless bets for their own profit. That is the
basic idea underlying the Volcker Rule.
And, to that end, the Volcker Rule prohibits banks with
FDIC-insured deposits or access to the Fed's discount window
from engaging in risky proprietary trading. We just believe
that is not something that the United States Government needs
to be subsidizing. That is the simple idea behind the Volcker
Rule.
Now, this should be something we can all agree on, but
unfortunately, I think this commonsense reform has been fought
tooth-and-nail by Wall Street banks and their allies. And I
understand why. We all understand that proprietary trading is
incredibly profitable for Wall Street banks. But just because
something makes Wall Street a lot of money doesn't mean it is a
good thing for the American people.
And let me take a moment just to address one statement that
has been made repeatedly, including today--I heard repeatedly
that proprietary trading did not cause the financial crisis.
And there are all kinds of people cited as saying that. But
let's go back to the facts here.
The investment bank Bear Stearns, for starters, started its
nosedive when it was forced to bail out two of its hedge funds
that had made highly leveraged proprietary trades in subprime
mortgage securities. That is when Bear Stearns went in the
toilet. Less than a year later, Bear Stearns was sold for
pennies on the dollar to JPMorgan to avoid bankruptcy. That is
example one.
Citigroup was forced to bring 7 investment funds it
sponsored with big proprietary bets in the subprime mortgage
market onto its balance sheet, assuming $58 billion in debt.
And less than a year later, Citi received multiple bailouts,
including the TARP bailout from the Federal Government--which I
voted against--without which it would not have survived.
Finally, Lehman Brothers, remember them? They made a huge,
risky proprietary bet in the same subprime mortgage market
based on their analysis that the bets that they made would be
profitable for the bank--for the bank, not for its customers,
but for the bank. In September of 2008, when those bets went
south and Lehman could no longer get funding for its day-to-day
operation, it was forced to file for bankruptcy.
These massive proprietary bets made in the subprime
mortgage market sent shock waves through the market and drove
our economy to the brink of collapse. Those are just the facts.
Proprietary trading and sponsorship of exotic investment funds
that enabled proprietary trading by banks were absolutely a
leading cause of the financial crisis. And I applaud the
regulators for putting a strong Volcker Rule in place to try to
prevent this type of risk-taking going forward.
Now, I heard from the panelists, and I can't remember who,
I think it might have been Mr. Robertson who complained that
there wasn't enough comment period on this rule. But just for
the record, there were 18,000 comment letters which were
submitted to the regulators in coming up with this rule. We had
111 stakeholder conferences. We began the discussion of Section
619 in July 2010. It took 3\1/2\ years to talk about it. We
talked this thing to death.
So, I just bristle at the idea that we did not spend enough
time on this and that the financial industry did not have
enough input. There was, from the outset, an effort to either
kill it or delay it until it died a slow death.
So, look, we know why folks want to kill the Volcker Rule,
but, in all honesty, I think it is a good step. Can we tweak it
a little bit, and like we did with the trust preferred
securities (TruPS), can we make sure that the unintended
consequences, if any, are mitigated? Sure, we can do that. But
make no mistake: We need this.
And if we are talking about job creation, and we are--the
title of this hearing is about how the Volcker Rule might hurt
job creation--let me go back over the effect on job creation of
not having the Volcker Rule.
Let's go back to September of 2008, when this started in
earnest. We lost 435,000 jobs that month; the next month,
472,000 jobs; the next month, November, 775,000 jobs were lost;
December, 705,000 jobs were lost; the next month--there is
nothing there that dipped below a loss of 700,000 jobs for the
next 6 months. So that is the impact on job creation of not
having the Volcker Rule.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
the Chair of our Oversight and Investigations Subcommittee, Mr.
McHenry, for 5 minutes.
Mr. McHenry. I want to thank my colleague on the other side
of the aisle for bringing up those issues. It sounds like it is
not really Volcker that he is talking about, because Bear and
Lehman didn't have a single deposit; they are not depository
institutions.
So the concerns that he raises are genuine ones and
concerns that we have raised in a series of hearings on too-
big-to-fail in the Oversight Subcommittee that the chairman has
directed. And the concerns we--
Mr. Lynch. Will the gentleman yield?
Mr. McHenry. --raise as a question of this is the scheme
that Dodd-Frank puts in place that does not end too-big-to-
fail.
Mr. Johnson, would you agree with that concern we have,
that Dodd-Frank does not end too-big-to-fail?
Mr. Johnson. Too-big-to-fail is still with us, Congressman.
But, unfortunately, all of what we have previously known as
investment banks have now converted to become bank holding
companies.
Mr. McHenry. Exactly. And we have talked about that.
Mr. Johnson. And that is an important part of the issue.
That is why I agree with Mr. Lynch that these things are
bundled together on a forward-looking basis. Whatever you think
happened in the crisis--
Mr. McHenry. Right.
Mr. Johnson. --it is all bank holding companies now.
Mr. McHenry. But Volcker actually doesn't end up protecting
the taxpayer, which is a genuine concern I have, that
institutions, private-sector institutions, when they fail, the
taxpayers are on the hook for it.
And, look, we have had good conversations about this, as
well. But the question I have for the panel today is: Can you
put a dollar amount on the cost, the economic consequence of
Volcker as is now set in stone by the regulators?
Mr. Bentsen, do you have a dollar amount?
Mr. Bentsen. No, sir, we can't, because we are--
Mr. McHenry. Okay.
Mr. Funk, do you have a dollar amount?
Mr. Funk. No, sir.
Mr. McHenry. All right.
Professor Johnson?
Mr. Johnson. Yes, Congressman. I thinks it is part of what
is being displayed on the wall here. According to the
Congressional Budget Office, the effect of the financial crisis
is to increase our debt over the cycle--
Mr. McHenry. Sure.
Mr. Johnson. --by about 50 percent--
Mr. McHenry. No, no. I am asking--
Mr. Johnson. --five-zero percent of GDP, half of GDP, call
that $8 trillion, because of the financial crisis and the depth
of the recession that created.
Mr. McHenry. So Volcker--
Mr. Johnson. The Volcker Rule addresses precisely the way
in which these largest bank holding companies, as they are now,
can take risk, can disrupt the economy. Their ability to do
this--
Mr. McHenry. I understand. I have limited time, and the
chairman is using the gavel today, actually, very well. I am
glad I got to ask a question before noon.
But to your point, Professor Johnson, for me as a
policymaker, I can't simply say, well, Volcker just saved us $8
trillion.
Mr. Ganz, do you have a dollar amount?
Mr. Ganz. The dollar amount I have is $7 billion if the
market moves 10 percent. It could be greater than that. But
that is the amount that it would impact the CLO market unless
there is some remedy very, very quickly.
Mr. McHenry. Okay.
Mr. Robertson?
Mr. Robertson. There is absolutely no way to put a dollar
figure on it.
Mr. McHenry. Okay.
So part of the concern is this: We have as a matter of the
Securities and Exchange Commission written policy that they
will have a cost-benefit analysis before they codify rules. We
have had a lot of good ideas across the whole panel here today
on ways to improve the Volcker Rule as it is written, if it is
going to be there. There are some genuine concerns that we can
mitigate the downside on this. And yet, at the same time, if we
had an interim final rule, we could resolve these things
without--in realtime market consequences in the way that, in
the rush of these five regulators to get things done, they have
done.
And the rush was to get the rule done, codified, and
rolling, and then try to tweak it in realtime. The TruPS issue
is a great example of this.
So I have an additional question. Mr. Bentsen, who is the
primary enforcer of Volcker?
Mr. Bentsen. There is not a primary enforcer, in our view.
There are five enforcers, and maybe six if you add FINRA to the
mix, which I think ultimately the SEC will look to FINRA to do.
Mr. McHenry. Mr. Funk, as a bank, you have plenty of
regulators, right?
Mr. Funk. We are a publicly traded bank, so, for us, we
have three: the SEC; the FDIC; and the Federal Reserve.
Mr. McHenry. Okay.
So, Professor Johnson, in this final moment I have, as we
said, too-big-to-fail is still with us. You have been an
advocate of simplicity--simple institutions, simple
regulations, what is happening in Great Britain and what Andy
Haldane has done in terms of this discussion on simplicity.
This is a complex rule. Do you think that there is a better
approach to this? What you said is this provides a ``good
chance'' that it will reduce risk. You are really not willing
to go on the line and say this absolutely will reduce risk. You
are saying it has a good chance.
Chairman Hensarling. Briefly.
Mr. Johnson. I think it depends on the implementation. I
worry a lot about this number up here. And I don't understand,
Congressman, why you, with your justified concerns about this
number, cannot draw the link, the very obvious link, between
the depth of financial crisis in the future and the--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott, for 5 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. I appreciate
it.
The one concern I have about the Volcker Rule--first of
all, let me say the Volcker Rule is needed. We should not be
using proprietary trading. It could form a very unstablizing
impact.
But there may be an unintended consequence here, and I want
to examine that. And that is in the international arena and how
we are placing our economic system in a weakened position if we
do not look very carefully at the competitive situation that we
place our banking--and not just our banking. Our banking is
just one part of it. We have companies and businesses. Ours is
not a one-economy-of-the-United-States economy. So it is very
important that our banking system not be put in an
uncompetitive edge when it comes to dealing in the world
markets.
Now, here is what I am talking about. I am a member of the
NATO Parliamentary Assembly. I serve on the Economic Security
Committee. That is an extraordinary committee. Two or three
times a year, we meet over in Europe, and we deal with--75
percent of the discussion is on what is happening in the United
States. So, let me just start with that for a moment.
Mr. Bentsen, we have a situation here where there is an
exemption for foreign banks and their affiliates from the
Volcker Rule as long as they are doing business outside the
United States and are not in any way controlled by a U.S. bank.
But that is over in Europe. Meanwhile, we have the European
Union and we have Great Britain who are forming their own
Volcker Rule.
So, in the midst of this, we are placing our economic
system and our banking system to operate in this environment.
So my point is, is there an area here where there is any
unforeseen danger to our impact, our position as the leader in
the economic activity of the world? I am very concerned about
that. And I have, sort of, a viewpoint, because I have to deal
with these other nations.
And not only that, the European Union is just one, and
within that are 28, 30 other nations, all with their own. And
on top of that, we have McDonald's, we have Google, we have
Coca-Cola, we have Delta, we have Deere tractor, Caterpillar.
We have huge companies that do business all around the world.
So I think it is very important to get an answer to this
question: One, is there something within this Volcker Rule,
within the environment and the reaction to it that I just
articulated about Europe and about Great Britain, is there
something with the exemptions that we are giving them here and
the complexity of all of that could put the United States
economy in a more vulnerable position?
Mr. Bentsen, will you take a crack at that first?
Mr. Bentsen. Congressman, yes, that is a very good
question.
First of all, the Europeans, either through the EU with the
Liikanen study and potential proposals coming after that, the
Vickers report, which is now being implemented in the U.K.
banking law, activities in Belgium, Germany, and France, are
all very different than the Volcker Rule. None of them ban
proprietary trading, for starters. They look a lot like the
Gramm-Leach-Bliley construct that we have had the United
States.
Second of all, you make a very good point, because while
the rules as they relate to foreign banking entities that are
captured by Volcker in the United States--and we represent many
of those in our membership--the rules are murky as to what they
can do outside the United States, we believe the biggest
concern to the United States is the impact on the depth and
liquidity of U.S. capital markets.
While we still are dominant in that field, we don't have
the vast majority that we once did. And we expect to see other
markets grow. But we know the Asians aren't going in this
direction, because they are trying to develop capital markets
to sustain their growing economy and move away from a pure bank
financing operation. The Europeans are trying to look at their
universal bank model and, again, how they get away from just a
pure bank balance sheet, or not a pure, but a heavily bank-
balance-sheet-dependent, and have more capital markets.
Whereas, in the United States, we run the risk of either
pushing people out of the capital markets or reducing the depth
and liquidity in our markets. And that really affects the
people who use it, and those are the issuers and the investors.
Mr. Scott. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Campbell, Chair of our Monetary Policy and Trade Subcommittee,
for 5 minutes.
Mr. Campbell. Thank you, Mr. Chairman.
There has been a lot of discussion so far about what is in
the Volcker Rule. I want to talk about something that is not in
the Volcker Rule which seems to be inconsistent to me.
My understanding is that, whereas the Volcker Rule
prohibits proprietary trading in private the bonds--so for the
private entities. It does not do so for sovereign debt and for
public debt, sovereign debt of other countries and for public
debt in the United States.
Now, I am from California, and where I sit, it would seem
to me that it would be less risky to have proprietary trading
in AAA-rated corporate bonds than in the municipal bonds of any
number of cities in California or of any number of sovereign
debt from any number of countries in Europe.
Is this an inconsistency? Do any of you see that it is okay
to do all the trading you want in what are clearly some very
risky U.S. Government and non-U.S. sovereign debt?
And Mr. Robertson is, like, champing at the bit on this.
Mr. Robertson. Yes, I do find it somewhat interesting that
the municipal debt has been excluded. And if you think about
it, it is really the public sector standing up and saying, we
think if you allow technically market-making but not trading,
that is going to reduce our access to credit.
So it is curious to me that we have decided that
proprietary trading has no social good or value in creating
liquidity and creating markets, but, with their own actions,
the municipalities have shown they don't believe that to be
true.
Mr. Campbell. All right. So it is a complete inconsistency,
in your view.
Other thoughts or comments on that?
Professor Johnson?
Mr. Johnson. My understanding, Congressman, is that foreign
debt denominated in a foreign currency is not treated the same
way as U.S. Treasury debt. The foreign governments wanted that,
they requested it, and they said and some private-sector people
said there will be dire consequences if they didn't get it. But
the treatment--they did not get--Greek bonds are not being
treated the same way as U.S. Treasuries under the Volcker Rule.
Mr. Campbell. No, but I think through a foreign subsidiary
they can, though.
Mr. Bentsen. Congressman--
Mr. Campbell. Yes?
Mr. Bentsen. Yes, if you are a foreign bank operation in a
home country--so a Barclays, who is a U.K. bank, can be
proprietary trading gilts through the--
Chairman Hensarling. Mr. Bentsen, if you could talk a
little closer to the microphone there?
Mr. Bentsen. Yes. Sorry.
There is somewhat of an exemption that was expanded as it
relates to foreign banking operations. However, importantly, a
number of U.S.-domiciled institutions are also primary dealers
in foreign sovereigns like gilts, like JGBs, and others, and
they are not afforded that treatment.
Mr. Campbell. Mr. Johnson?
Mr. Johnson. I think you should worry, Congressman,
precisely about where there is either a residual responsibility
to the U.S. taxpayer, hence the debt number, or an impact on
the U.S. economy from some sort of investment, speculative or
otherwise, in exactly sovereign bonds, foreign sovereign bonds.
Because those are much more risky than commonly perceived.
So, to the extent that this exemption becomes what you
might call a loophole which poses risk to the U.S. economy, I
would worry about it. But we also can't take upon ourselves,
unfortunately or fortunately, the role of regulating all of the
world's banks.
Mr. Campbell. Does anyone disagree with the view, on this
panel, that regardless of where you are on the Volcker Rule, on
the proprietary trading in general, that the treatment of
corporate debt and of municipal or government debt, be it in
this country or--should be aligned?
Okay. There is no--Mr. Bentsen?
Mr. Bentsen. Congressman, it is a very interesting
question. It is a conundrum, no question. I believe
policymakers, at the time that they put in the restriction on
proprietary trading, obviously had concerns that restriction
could have negative consequences for the U.S. Government debt
market, for the--
Mr. Campbell. To say somehow it will have consequences on
municipal but it won't have consequences on corporate, that
makes no sense. Clearly it does, and clearly it was intended
that government is virtuous, and therefore their debt, albeit
bad, is virtuous, and so it is okay to do proprietary trading
there. It just seems wrong to me.
Mr. Johnson?
Mr. Johnson. Congressman, you are obviously right.
Historically and forward-looking, there are risks in both
municipal debt and in corporate debt, and sometimes the risks
occur in one sector and sometimes in the other sector, and
sometimes they affect the economy.
I would separate out U.S. Treasury debt. I would treat U.S.
Treasury debt separately because that has different risk
characteristics. But I think to the extent that you are
concerned about there being risks and corporate risks in
municipal debt, that is obviously what we have seen in the past
and what we will see in the future.
Mr. Campbell. Thank you all very much. I yield back the
balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Sherman, for 5 minutes.
Mr. Sherman. I am wondering a bit why the Volcker Rule
applies to debt instruments such as bonds at all. If a bank
makes a loan to a business, that is what they are supposed to
do. If I understand the Volcker Rule correctly, if they buy
corporate bonds of a similar business, that is restricted. The
disadvantage of bonds is that your profits and loss are readily
apparent to the world every day, whereas if you make a loan to
a business, you assume the same risks, but you can keep them
hidden. Nobody knows what that loan is worth this day or that
day.
I wonder, Mr. Ganz or others, do you have a comment on
whether the Volcker Rule should apply to debt instruments?
Mr. Ganz. Sure. The idea behind the section that is on
ownership interest was to take what looks like or is called a
debt instrument, but really has indicia of ownership like an
equity. So, it has some upside. It gets part of the profits.
But for--
Mr. Sherman. You are talking about convertible debt?
Mr. Ganz. No, I am talking--it is not specific. It just,
for example, has the right under the terms of the interest to
receive a share of the income, gains or profits of the covered
funds.
Mr. Sherman. So, participating debt.
Mr. Ganz. Right.
Mr. Sherman. So the Volcker Rule applies only to debts that
participate in profit, not straight debt instruments.
Mr. Ganz. Exactly.
Chairman Hensarling. Mr. Ganz, could you bring your
microphone a little closer, please.
Mr. Ganz. I'm sorry. The problem for TruPS and the problem
for CLOs is that one of the seven indicia of ownership is
really not an ownership indicia, it is a debt protection. And
that is what is going--
Mr. Sherman. What is that one out of seven?
Mr. Ganz. It is the ability to remove or replace a manager
for cause. So if the manager gets arrested or does something in
violation of the indenture, that is a protective characteristic
of a lot of debt instruments.
Mr. Sherman. Let me move on. But that seems to be trivial,
and I would think they can modify that.
What about the ``Hotel California'' rule, that if you are
covered by the Volcker Rule, and then you are no longer a
commercial bank or own a commercial bank, you are still covered
by it? Does anybody see a need to let people out of the hotel a
few years rather than forever?
Mr. Johnson. Congressman, the problem is, of course, that
once you extend this protection of the bank holding company
status to the investment banks, which was done in the fall of
2008, Goldman Sachs and Morgan Stanley became bank holding
companies, that has come historically with a lot of
restrictions. We will see what happens going forward.
Certainly Goldman, and I think also Morgan Stanley, said at
some point subsequent to that, if you are going to impose the
full restrictions of bank holding company status on us, then we
don't want to be a bank holding company anymore, we will go
back to being an investment bank. In other words, they want
full access to the Fed when they need it, but not when they
feel it--
Mr. Sherman. There is little assurance that we would give
it to them again. But if we apply the Volcker Rule to any
corporation that has been ever a bank holding company, we could
also apply it to any corporation that might in the future
become a bank holding company. Yes, Goldman went out and
acquired a bank and became a bank holding company. So could
Apple Computer tomorrow.
Mr. Johnson. Congressman, no. You should worry about--
Mr. Sherman. So could many others.
Let me move on to one other issue, and that is we saw with
AIG that you can have a highly risky parent owning subsidiary
corporations. As long as the subsidiaries are properly
regulated, they survive fine. Do we need to apply the Volcker
Rule to bank holding companies, or do we just need rules to
protect the banks themselves? What risk is there to the U.S.
taxpayer as long as the bank subsidiary is safe?
Mr. Funk. It is my understanding, Congressman, that it does
apply to bank holding companies because the Federal Reserve is
one of our regulators, and they--
Mr. Sherman. Yes, I am asking whether from a public policy
standpoint that is necessary.
Mr. Johnson. But, Congressman, remember, it was AIG
Financial Products. It was a subsidiary of the holding company
in London that had the very big losses. So this wasn't a bank
holding company situation.
But to take your analogy--
Mr. Sherman. But the regulated subsidiaries did fine. The
unregulated entities that did not face that level of U.S.
insurance--
Mr. Johnson. There were huge losses to the group, and it
was an impairment to the credit of everyone in that group
because of what had happened in this one unregulated
subsidiary. So I think going at the bank holding company level
makes a lot of sense.
Mr. Sherman. Mr. Bentsen?
Mr. Bentsen. I would just say, Congressman, regardless of
Volcker, AIG is now captured under the systemic designation,
and so they are regulated at the holding company level, across
which they wouldn't have been before.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, the Chair of the House Foreign Affairs Committee, for 5
minutes.
Mr. Royce. Thank you very much, Mr. Chairman. I was going
to start with Mr. Bentsen with a question based on your
testimony, your opening statement. You mentioned the need for
the regulators, the five rule writers, along with the National
Futures Association and FINRA to, in your words, coordinate: to
be consistent in their interpretation, in their examination,
supervision and enforcement of the final regulations.
Is there enough clarity here for the industry on this
point? Because what happens if the OCC says certain conduct is
acceptable, and then the SEC says no? Or, let us say FINRA has
a different viewpoint. How is that handled?
This is one of the concerns we have always had about, when
we did have the financial implosion, there was a lot of
discussion about trying to set up a world-class regulator that
could call the shots and make the decisions. You would have a
primary regulator that could do all of this. This is a very
different environment. Let me hear your thoughts on that.
Mr. Bentsen. Thank you, Mr. Chairman, for that question.
The rule in no way states how the regulators are going to
coordinate. In fact, it acknowledges that there is not a method
or protocol for doing that, and acknowledges that there is
overlap in jurisdiction. So we think it is very lacking in that
respect.
We actually in our comment letter suggested that perhaps
the Federal Reserve should act as the lead regulator since
Congress gave them the ability to extend the conformance period
since you were amending the Bank Holding Company Act. But there
is no mechanism, no protocol, and as a result of that, our view
is based upon the underlying statute that it really should be
the role of the FSOC now to step in as they have under their
mandate to act as the coordinating body to put that in place.
Mr. Royce. Any other views by other members on the panel on
this?
Mr. Funk. Mr. Chairman, I would say from the ABA's point of
view that we recognize there will be times when there are
different sets of rules, and we would welcome some way for
clarity to come to this process where they all apply rules the
same way, and if that has to come from Congress, we think that
is a good solution. But we don't think you can have five sheets
of music, because some of our members are regulated by all
five, and if the rules are interpreted differently, I think
that is a real problem.
Mr. Royce. Let me ask Professor Johnson.
Mr. Johnson. Sir, I think, Mr. Royce, you raised a very
good issue. The Financial Stability Oversight Council was
created specifically to try and bring better coordination
across these disparate agencies, and the Chair of that is the
Secretary of the Treasury. And I think the Secretary of the
Treasury should have a responsibility for making sure that they
are all on the same--using the same sheet of music. That is a
very reasonable request.
Mr. Royce. Rather than the Fed taking the lead on it? Or
what--
Mr. Johnson. That is a great question you could debate for
a long time. The Chair of the FSOC, eventually that job went to
the Secretary of the Treasury, so that is the logical place to
ask for better coordination on specifically this kind of issue.
Mr. Royce. Mr. Ganz?
Mr. Ganz. We agree. The issue that we are dealing with now
is a perfect example. We are asking for an FAQ, something
really, really simple. We have to go to--we apparently have to
go to five agencies, one of which has really nothing to do with
the product--loan product at all, the CFTC. So that is
incredibly cumbersome, and a streamlined process would be very
helpful.
Mr. Royce. And lastly, Mr. Robertson, your commentary.
Mr. Robertson. I think there is the need to better
coordinate regulation, and we are even seeing regulation coming
down the pike that is conflicting with other regulations. So it
is creating a lot of complexity for all constituents in the
financial system.
Mr. Royce. And then I am sure this issue has been asked,
but I saw that CalPERS out in California raised the concerns,
the same issue really about regulation: How do you make sure it
is consistent? But they are making the point of global
regulation on this issue. Just a quick commentary on that.
Mr. Bentsen. Mr. Chairman, as I stated earlier, while other
jurisdictions in Europe are talking about changes in bank
structure, going from looking at the universal bank model that
you know that they have in Europe, Liikanen and Vickers are
really more in line with what I would call the Gramm-Leach-
Bliley construct than a ban on proprietary trading, the more
ring fencing or separate operating subsidiaries or affiliates.
And in Asia, frankly, they are trying to develop their capital
markets out there, and so they are not moving in this direction
at all.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing, and, if I may, I would like to single out my
friend, the Honorable Ken Bentsen, who was a U.S.
Representative from the State of Texas, in fact for some of the
area that I currently represent. Thank you for appearing today.
Also, I would like to congratulate you. I think the last time
you were here you did not hold the title of president and CEO.
I think you have been promoted since we last saw you. So,
congratulations. And by the way, I am not going to say
congratulations and then say, now let's get on with it. I do
want to talk with Mr. Johnson for just a moment.
Mr. Johnson, should there be some limitation imposed upon
banks in terms of proprietary trading, in your opinion?
Mr. Johnson. Yes.
Mr. Green. Should they be allowed to use taxpayer dollars?
Should there be some limitation on tax dollars that are--
consumer dollars that are in banks which are backed by the
Federal Government? Should there be some limitation?
Mr. Johnson. Yes, Congressman, there should be some
limitation on the proprietary trading activities of the largest
bank holding companies in this country.
Mr. Green. Is it true that this is what the Volcker Rule
seeks to do?
Mr. Johnson. That is absolutely the intention originally of
Chairman Volcker, and of the legislation from Congress, and
what the regulators worked on for nearly 4 years.
Mr. Green. Now, do this for me. We have talked a lot about
proprietary trading, but we haven't taken just a moment to let
the public know what proprietary trading really is. Would you
please give us a definition of ``proprietary trading?''
Mr. Johnson. Congressman, the term ``proprietary trading''
in this context means an investment made by a bank holding
company for the purposes of betting, for the purposes of
getting some capital appreciation. They are not buying a
security in order to sell the security as part of market
making--
Mr. Green. Who is to benefit from it? Who is to benefit
from that trade you that just called to my attention?
Mr. Johnson. The people making the trade within the bank,
and executives of the bank, and perhaps the shareholders of the
bank.
Mr. Green. Will the customer who has a deposit, will that
person benefit from the proprietary trading, directly benefit
from it?
Mr. Johnson. Assuming that there is no direct positive
impact on the customer, and, as has been flagged already in the
hearing, there may be conflicts of interest. There are
certainly documented cases where it has arisen that the bank
has been trading in its own interests on a proprietary basis,
and that has been a conflict of interest with business they are
doing for the customer.
Mr. Green. So what we have is this: We have a bank that
takes some of its customers' dollars, and it uses those dollars
to engage in this thing called proprietary trading, which is
using the dollars to benefit shareholders in the bank, the bank
itself perhaps, but not those customers. Is that correct?
Mr. Johnson. That is correct. That was the structure, for
example, of JPMorgan's so-called London Whale proprietary
trading.
Mr. Green. And do you think it is unreasonable to want to
curtail the amount of dollars that are proprietary, that are
traded in this fashion so that customers don't end up at some
point suffering? We don't know that it will happen, but it
could happen. Are we trying to protect the customers of the
bank?
Mr. Johnson. We are trying to protect the customers, but we
are also trying to protect the taxpayer. Remember, Congressman,
many times these bets don't work out very well. They turn out
not to be profitable. The expectation is they will make a
profit, but they are very risky. So sometimes they get the
negative downside on those bets. They lose. Who is on the hook
for the losses? If it is a big bang holding company, one of the
largest, there is a government backstop through the Fed and
other ways, and that is the taxpayer ultimately.
Mr. Green. Does the Volcker Rule prevent banks from using
other capital to engage in proprietary trading?
Mr. Johnson. The Volcker Rule as designed restricts the
amount of proprietary trading that banks can do, both using
customer funds and, for example, going out and borrowing
additional money with which to speculate.
Mr. Green. Exactly. But are there other funds that they can
use?
Mr. Johnson. Again, in principle there are restrictions on
their ability to make these speculative investments and
therefore to fund investments with funding sources of any kind.
Mr. Green. Is it the opinion of any one of you, dear
friends, that the Volcker Rule should be completely eliminated?
If so, would you kindly raise your hand? I have heard your
testimony, but I just want to make sure I understand. Is there
anyone who thinks it should be completely eliminated? If so,
raise your hand.
Let the record reflect that no one has indicated that it
should be completely eliminated.
Mr. Bentsen. Congressman Green--
Mr. Green. Let me do this. I only have 12 seconds, and I
will come back to you in about 3 seconds. But quickly now, tell
me this: Do you think that we can tweak it, we can mend it
rather than end it, and it can be a benefit to us? If so, would
you kindly extend your hand? This time, I want affirmative
action.
All right. I see three persons. So should I conclude we
have other persons who don't--
Chairman Hensarling. The Chair has concluded that the time
of the gentleman from Texas has expired.
Mr. Green. Thank you. And, Mr. Chairman, I would now ask
that my friend be allowed to respond.
Chairman Hensarling. The Chair now recognizes the gentleman
from Wisconsin, Mr. Duffy, for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
I want to follow up on a question that Mr. McHenry had been
asking, and it goes to the cost looking forward of Volcker. And
I guess I would ask you, Mr. Johnson, looking forward, I know
you pointed to the debt screen, but looking at its impact on
our economy, impact on our capital markets, do you know the
cost of that? Do you have an assessment of that cost?
Mr. Johnson. So the cost that we see now, Congressman--and
I am looking at the testimony that has been provided to this
committee and from other industry experts where they predicted
certain outcomes, and I am looking to see whether these have
actually transpired. The cost to the economy, which is the way
you framed it, the right way to frame it, is very, very small.
Now, there are adjustments still to be made, and that is what
we are talking about today. But in terms of lost economic
output, in terms of lost debt for the capital markets, in terms
of any of the other concrete, specific costs that have been
floated or suggested hypothetically, I am afraid I don't see
them. I have not seen independent analysis that really
quantifies those.
Mr. Duffy. And I would agree with you. I haven't seen that
analysis either, because the writers of the rule didn't do a
cost-benefit analysis, which is one of our concerns. Just like
the CFTC and the SEC do, so, too, should the rule writers so we
could actually take a look in a little more in-depth way on the
cost of this. And I am sure those who are involved in the CLO
market space will think the consequence of the rule is pretty
profound.
Does the rest of the panel think that a cost-benefit
analysis could have helped hone the rule and left us with a
better product? Mr. Bentsen?
Mr. Bentsen. Absolutely.
Mr. Duffy. Mr. Funk?
Mr. Funk. Yes.
Mr. Duffy. Mr. Ganz?
Mr. Johnson. Congressman, you would also have to include
the benefits. So it is not the cost, it is the cost and the
benefits that you need to include, including the reduction in
systemic risk and what that does for the economy.
Mr. Duffy. Thank you.
Mr. Ganz?
Mr. Ganz. Yes, absolutely.
Mr. Duffy. Mr. Robertson?
Mr. Robertson. I would say yes, and I think there are two
costs and potential benefits. But the costs are not only what
would this do to the economic activity, but there are also
costs that are going to increase the financial costs of running
different entities that will be passed on to consumers and
corporations.
Mr. Duffy. Yes.
Is it fair to say that the securitization markets were
explicitly excluded from Volcker and Dodd-Frank?
Mr. Bentsen. Congressman, no, they were not. Securitization
in some form was excluded, but securitization is captured in
others, as Mr. Ganz has raised and others have raised. And
then, of course, there is a whole section of Dodd-Frank that
deals almost explicitly with securitization, starting with QM
to QRM to risk retention. And so--
Mr. Duffy. But with regards to Volcker, Mr. Ganz, were you
surprised to see CLOs included in the Volcker Rule?
Mr. Ganz. In the original proposal we were very surprised,
especially since there was a rule of construction that was
meant to carve out securitizations, particularly of loans. I
think the legislative history reflects that this was targeted
towards private equity and hedge funds. Asset-backed securities
are neither of those. So, yes, we were surprised to see that.
Mr. Funk. If I could add, I saw a letter yesterday written
by the management team of a $20 billion community bank, a large
community bank, in the Northeast, and that $20 billion bank has
a $360 million CLO portfolio that they will have to divest. And
that is part of their core operating business, and that is $360
million that someone is going to have to borrow someplace else.
And I don't think--getting to the Volcker Rule, that bank is
not systemically important, and the CLOs are not systemically
risky.
Mr. Duffy. Because CLOs didn't have--they weren't the cause
or a big part of or a little part of the financial crisis, were
they?
Mr. Funk. Not with this bank, no.
Mr. Duffy. If you will look at our global marketplace, what
other countries have implemented a Volcker-like rule that we
can look at and analyze its impact on its capital markets?
Mr. Bentsen. I would say none.
Mr. Duffy. Do you guys all agree? There is none, right? We
are the first ones.
Mr. Johnson. Is that a bug or a feature, Mr. Duffy? Are we
supposed to wait for the Europeans to sort out their financial
system, which is a complete disaster, or to follow one of these
Asian routes with a lot of State subsidies, or to try to back
away from the taxpayer support--
Mr. Duffy. Maybe if we had we done a cost-benefit analysis
and gone through the appropriate steps to look at the impact on
our capital markets, we might feel a little more comfortable.
Mr. Bentsen, is it going to affect America's ability to
remain competitive, whether it is in our banking space or in
our small business, medium business, large business space?
Mr. Bentsen. Our biggest concern is if the regulation, the
compliance burden of the regulation is so onerous, and we don't
know yet as we are going through this, that it causes firms to
pull back from commitment of capital to market-making
activities, that will affect the debt liquidity of U.S. markets
to the detriment of the issuers and investors who rely on it.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison, for 5 minutes.
Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member
Waters. I appreciate the time. Also, I want to thank all of the
witnesses today for helping us to understand things.
I might just ask generally, this may be--the Volcker Rule
may be unique to the United States, but I would imagine there
are a lot of other rules that other countries have that you may
not want, and I doubt you would ask us to follow them. Like,
for example, how many of you are in favor of financial
transactions tax?
Okay. So I guess being first is not always a bad thing.
Let me ask you a few questions, Mr. Bentsen. Again, thank
you for your work. Thank you for helping us understand the
issues today.
In my district, the Fifth District of Minnesota, we are
still reeling from the financial crisis. It hit us really hard.
We had about 35,000 foreclosures in Hennepin County between
2007 and 2014. Home prices fell 16 percent. Our rental housing
market is the tightest in the Nation. And I served on this
committee when we passed the Dodd-Frank bill, and the creation
of the CFPB, regulation of swaps market, implementation of the
Volcker Rule are all critical reforms that we tried to put in
place to prevent that calamity from which average Americans are
still reeling. We still have 7 percent unemployment.
So I have been a little bit worried about certain elements,
not all, I don't want to paint with a broad brush, but some
players in the financial services industry, again not all, who
appeared to be resisting reform at every turn. In fact, there
is an article about it that I would like to have entered into
the record. It is a March-April 2013 Washington Monthly article
entitled, ``He Who Makes the Rules.'' This article describes,
again, certain players in the financial services industry and
their litigiousness and their just straight-up resistance and
obstinance to commonsense regulation.
I notice that SIFMA has filed a lot of lawsuits, including
against the CFTC, saying it lacked the authority to establish
position limits despite Congress' clear requirement that it do
so. SIFMA also sued Richmond, California, for thinking about
eminent domain to address their underwater mortgage situation.
And also since the financial crisis, I guess I am curious, how
many lawsuits have you guys filed since the financial crisis?
Mr. Bentsen. First of all, SIFMA did not sue in the case of
Richmond, California.
Second of all, in the case involving position limits--
Mr. Ellison. I don't want to go through the cases. I just
want to know how many lawsuits you filed.
Mr. Bentsen. I just want to say that actually--
Mr. Ellison. Excuse me, Mr. Bentsen. I certainly want to
hear what you have to say, sir, but as you know, time is very
limited. You and I could have a more extensive conversation
offline, but right here, right now, I need you to answer my
question. How many lawsuits have you guys filed on financial
regulation?
Mr. Bentsen. SIFMA has been a party to two lawsuits related
to financial regulation.
Mr. Ellison. I appreciate that.
Do you guys plan to sue over the Volcker Rule?
Mr. Bentsen. We have no plans to sue over the Volcker Rule.
Mr. Ellison. Okay. Let me ask you this. I read your
testimony, and I thought it was very interesting. And I guess
the basic tenor of your message is that the Volcker Rule is
just too complicated to implement. Now, I want to ask you, is
this a matter about how complex and complicated it is, or do
you disagree with the Volcker Rule in principle?
Mr. Bentsen. We disagree with the Volcker Rule in
principle. We state that up front. But we did not say--and if
you interpreted that, then we didn't write it correctly. We did
not say that it is too complicated to implement. We said it is
extremely complicated, and how it is implemented is very
important.
Mr. Ellison. So when Mr. Green asked everyone to raise
their hand, notwithstanding your suggestions about what we may
or may not do to make it better, who would repeal it, who would
not repeal it, you kind of lifted your hand up. Everybody else
said that they would be willing to try to work with it in some
form or fashion. But you really are just against it, and I
appreciate your candor.
Mr. Bentsen. Congressman, if I may, the point I was going
to make to my dear colleague and friend from Houston, my fellow
Houstonian had raised is that we were very clear from the very
beginning that we did not believe that the Volcker Rule was
part and parcel to the financial crisis. We have a
disagreement. We agree with Secretary Geithner's comments and
Mr. Volcker's comments with respect to that, and we made that
clear. But it is the law of the land, and our members are
moving forward to comply with it.
Mr. Ellison. Let me ask you this: Do you think that it is
good practice for a financial institution to use taxpayer-
subsidized money to engage in proprietary trading? I am sure
you have a bunch of--you don't think we should have a rule, but
do you think it is good practice or not?
He should be able to answer, Mr. Chairman.
Mr. Mulvaney [presiding]. I am going to cut him off there.
The gentleman's time has expired. The gentleman's item will be
accepted into the record. Without objection, it is so ordered.
If the gentleman from Virginia would like to allow the
gentleman to answer, that is fine.
The Chair now recognizes the gentleman from Virginia, Mr.
Hurt, for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
I want to thank you all for appearing before us today on
this very important issue.
My congressional district is in rural Virginia. I represent
everything from North Carolina all the way up to Fauquier
County. We have 22 counties and cities. We have many, many Main
Streets all across Virginia's Fifth District, so we don't
represent big Wall Street firms. My district is, like I said,
rural. We have a great interest in consumer protection.
And I know that in the aftermath of the economic crisis,
there was a lot of concern about consumer protection, what do
we do to protect the consumer, but when I look at some of the
unintended consequences of Dodd-Frank, some unintended, some
intended, although I would admit certainly all with best
intentions, good intentions, I think that what we have seen is
that consumers aren't protected, but in many instances
consumers are ultimately harmed because of the weight of many
of these regulations that result in reduced choices and
increased costs.
I think that you can see that when you look in the broad
picture, the accumulation of these regulations as it relates to
community banks, for instance. If you look, I think in the last
30 years, we have reduced the number of community banks that we
have in this country by half. We have gone from 16,000 to
7,000. And I think that is a reflection--you can't blame that
all, obviously, on Dodd-Frank, but I do think it is a
reflection of, again, the accumulation of the regulatory
structure.
I guess my question is--and I would love to have Professor
Johnson and then Mr. Bentsen and Mr. Funk answer this question
in that order--is there a concern and are you aware of any
analysis that has been performed on the potential impact on
access to capital for nonfinancial small and midsized
businesses with the confluence of the Volcker Rule, the
implementation of the Basel III standards, new derivative
regulations, and the SEC's impending money market regulations?
Are we concerned about the aggregate, and do we know, do we
have any idea what the effect of those would be?
And I wonder also this: Isn't it incumbent upon the
individual agency that promulgates these rules to be concerned
about where their rules fit in the panoply of rules that are
obviously increasing the weight for these businesses?
Mr. Johnson?
Mr. Johnson. The agencies certainly should be concerned,
Congressman, with all of those issues, and the questions you
raised are very good questions. What is the impact of this big
change in the way we oversee the financial system, both
nationally and internationally.
Mr. Hurt. Do you think the agencies should conduct a cost-
benefit analysis on each rule?
Mr. Johnson. Congressman, there are very specific legal
requirements for agencies. I am not an expert on those. Let me
speak from the economic point of view.
The reason we have this long and large comment period was
precisely so that many different stakeholders, both from within
the industry and from elsewhere, could articulate precisely
what you are concerned about and tell the agencies what the
costs will be, some of which they may be able to imagine, and
some of which they haven't fully anticipated. That is a very
good process we have in this country. Many other countries,
most other countries do not have such a public comment process.
I don't promise you that we get to one definitive number.
It is a very complex world in which we live. But, yes, we have
narrowed down the possibilities, and we have converged on a set
of rules that are unlikely to have--
Mr. Hurt. Thank you. Let me get to Mr. Bentsen, just so he
will have time to answer.
Mr. Bentsen. Congressman, first of all, let us say from the
capital standards, we agree that capital standards needed to go
up, and they have gone up about 400 or 500 percent since the
crisis, but it is also a fact that capital is not free, and it
has--and the price of capital has an impact on the price of
credit and capital to the end user. So, there is no question
about that.
Second of all, enhanced compliance burden will also have an
effect on price, and it could have an effect on liquidity and
availability.
So these will have an effect. We don't know yet, but they
will have an effect.
Mr. Hurt. Thank you.
Mr. Funk?
Mr. Funk. I think your question was about the cumulative
effect of regulation, and in the time I have, I would like to
tell you, the footprint of our bank would fit well in your
district. We are in North English, Iowa, the only banking
office in town. We are in Melbourne, Iowa, the only banking
office in town. We are in Sigourney, Iowa. There are only two
banks in Sigourney, Iowa.
Our company's employment 2 years ago--3 years ago was about
380 people. It is still about 380 people, but we have added
between 6 and 8 positions just to deal with compliance, which
means that is 6 to 8 fewer people out in the community serving
our customers. And I think that is the answer I have on
compliance.
Mr. Hurt. Thank you, Mr. Funk.
I think my time has expired. Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Colorado, Mr. Perlmutter, for 5 minutes.
Mr. Perlmutter. Good afternoon, gentleman. Thank you for
your testimony. And thanks for staying here so long.
I do want to ask unanimous consent that the Bloomberg
Report of January 13, 2014, be introduced into the record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Perlmutter. This is what it says, the beginning
sentence: ``The U.S. posted a record December budget surplus as
higher payroll taxes, payments from Fannie Mae and Freddie Mac,
and a declining unemployment rate helped improve the
government's finances. Revenue exceeded spending by $53.2
billion last month compared with a $1.19 billion deficit in
December 2012.''
So now, I kind of want to do a little history lesson,
because as I see you, Mr. Bentsen, and you, Mr. Funk, sitting
next to each other, there is the old saying that politics makes
for strange bedfellows, but so does finance.
So in 1929, we had a crash. In 1933, the first act of the
Roosevelt Administration was Glass-Steagall, separating
commercial banks from investment banks and insurance companies,
and also creating the FDIC and establishing unitary banking.
Fast-forward to 1999. We have Gramm-Leach-Bliley, which Mr.
Bentsen referred to, which more or less eliminated the
separation between insurance companies, investment banking
institutions, and commercial banks.
Go forward to the summer of 2008. The stock market is at
13,000, okay? Then we have tremendous tumult in every market,
both the commercial banking, the investment banking, pretty
much everything, so that by March 9, 2009, that stock market
had dropped from 13,000 to about 6,500. And it is $1.3 billion
per point, so $7-point-something trillion in 6 months lost just
in the stock market. Forget about jobs, forget about housing.
So in the course of putting TARP together, the Recovery
Act, the Dodd-Frank bill, and in the last 5 years, we have seen
ourselves gain 8 million jobs, the stock market today just hit
16,501. It has gained 10,000 points since that low mark 5 years
ago. So that is $13 trillion. So we put in $700 billion to save
the system through TARP. That has been paid back with interest,
a substantial amount. That is where we are today.
I offered--and Mr. Bentsen, you may remember this--two
amendments when we went through Dodd-Frank. One was to, in
effect, repeal Gramm-Leach-Bliley and reinstitute the
separation of investment bankers from commercial bankers like
Mr. Funk. That didn't pass. I did an amendment, too, that was--
and I would offer it into the record, too, the amendment that
did pass, which was two pages long.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Perlmutter. This amendment said, no proprietary
trading. Banks, commercial banks, couldn't trade for their own
account, which, Mr. Funk, my guess is your bank doesn't trade
stocks or commodities for its own account.
Mr. Funk. We do not.
Mr. Perlmutter. Okay. So but that then was amended in the
Senate to become what is the precursor and now the Volcker
Rule.
So, gentlemen, and I will start with you two, in trying as
Congress dealing with the reality of the financial markets
where we have major institutions that do investment banking,
that do commercial banking--and it isn't just Goldman Sachs and
it isn't just Morgan Stanley, but it is others. Would you have
us go back to separating completely commercial banking from
investment banking and insurance?
Mr. Funk, I will start with you.
Mr. Funk. I would not, but I think you have to have
restrictions in place. I am here speaking on behalf of our
industry, and I think you have to have sensible regulation that
monitors and that regulates.
I would also say that when you talk about regulation--I
speak for the industry, and most of the bankers I know are not
opposed to regulation. But it is the regulation that doesn't
seem to make sense and that hurts consumers--not doesn't help
consumers, but hurts consumers--is what we really have a
problem with.
Mr. Perlmutter. And I would respond to you, when we have
points of contention like the trust indenture, you have to come
to us so we can correct those things. And I would offer up my
services to help you or Mr. Bentsen or anybody else at the
table. But we can't have the same kinds of losses that we
suffered in 2008. At least not in my lifetime, I don't want to
see them again.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Ohio, Mr.
Stivers, for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
calling this hearing.
I want to follow up on some questions and points that Mr.
Duffy, the gentleman from Wisconsin, made earlier. All of you
agreed that the rule would have benefited from a cost-benefit
analysis. Can you raise your hand if you agree with that?
So I thought you all agreed. Did you not agree, sir?
Mr. Johnson. I think--
Mr. Stivers. I said a cost-benefit analysis.
Mr. Johnson. I think they did an analysis of the costs and
the benefits. Perhaps you have a specific other legal standard
in mind. But they looked to the cost in the analysis. That is
cost-benefit analysis.
Mr. Stivers. They did not do a cost-benefit analysis as
required.
Do all of you agree that the rule would be clearer if there
was better regulatory coordination, or, again, does the
gentleman in the middle disagree? Do most of you agree? Raise
your hand if you agree.
Okay. We have one dissenter again.
On competitiveness, I have a question for Mr. Bentsen and
Mr. Robertson. The Financial Times said that the Dodd-Frank
rules, especially the Volcker Rule, could ultimately hamper the
way that the corporate bond market now works. Do you believe
the Volcker Rule will dry up liquidity in the corporate bond
market? Be as brief as possible.
Mr. Bentsen. Look, it could. As we see how these rules are
put into practice and how the compliance regime works, it could
cause firms to have to pull back from market-making activity
that they do in the corporate bond market and other markets,
and that would pull liquidity and could affect U.S. markets.
Mr. Stivers. Mr. Robertson, do you agree with that?
Mr. Robertson. I would agree as well. We have significant
concerns that, depending on how it is implemented, it could
reduce liquidity for underwriting and also for even warehousing
debt.
Mr. Stivers. So if there is less liquidity in the corporate
bond market, will that change investors' willingness to buy
corporate debt, Mr. Robertson?
Mr. Robertson. Absolutely. And I think there is an issue
even of just getting the inventory to market in a timely
manner. And moreover, if there is not adequate access to
hedges, that is also going to limit financial transactions and
activity.
Mr. Stivers. Tell me what that means to jobs in this
country.
Mr. Robertson. For example, at the CFTC hearing we had a
CFO of an energy company which is heavily reliant on
derivatives to undertake massive capital expenditures, hundreds
of millions of dollars, to go out and explore for oil because
they need to have that future price locked in. That is just
thousands, tens of thousands, hundreds of thousands of jobs
across the economy that are reliant upon risk-mitigation tools.
So depending on how this is deployed, if it has any impact
on restricting access to derivatives that are used for
legitimate hedging, that could have a very massive impact on
the economy and jobs.
Mr. Stivers. Thank you.
And there was previous testimony, I don't have time to get
into it, that also talked about the competitiveness of America
versus Europe and Asia with regard to America being the only
country thus far that has banned proprietary trading, and that
also would affect jobs.
My next question is for Mr. Funk. Earlier in your
testimony, you said your bank is about $1 billion?
Mr. Funk. $1.7 billion.
Mr. Stivers. Okay, I am sorry to short you there; $1.7
billion. But your bank relies on trust-preferred securities, I
assume, as part of your operations?
Mr. Funk. They were bought in 2005-2006--
Mr. Stivers. But they are on your books?
Mr. Funk. Yes, $9.7 million when we bought them, a very
minor part of our investment portfolio.
Mr. Stivers. Sure. But let us say there is a bank, so in
yesterday's interim final rule authorizing it, it allows banks
under $15 billion to keep them.
I want to echo some remarks of Democratic Senator Sherrod
Brown yesterday. Can you tell me, you are a banker, your bank
has about $2 billion in assets. Does that differ from a bank
that, say, has $50 billion or $60 billion in assets? Like in my
community Huntington Bank is $52 billion, but they use trust-
preferred securities, they are in the same exact business you
are in. If those investments are not risky for you, why should
they be considered risky under this requirement for somebody
over $50 billion?
Mr. Funk. I think, Congressman, the ruling yesterday
applied to everyone. So I think that most banks in America are
going to be very happy with what was issued yesterday. It was
without regard to size.
Mr. Stivers. So they did lift the $15 billion yesterday.
Okay.
Mr. Bentsen. I think the size issue is related to the
issuer of the trust-preferred, not to the buyer of the trust-
preferred.
Mr. Stivers. Not to the buyer of the trust-preferred. So
that does help. But the point is it doesn't matter your size as
the buyer; it doesn't change of the risk of the investment, the
size of the buyer, does it?
Mr. Funk. I agree 100 percent with that statement.
Mr. Ganz. Congressman, that would be extremely important in
the CLO context. A resolution that would cut it off based on
the size of the bank holding would not work, not for the larger
banks and not for the smaller banks.
Mr. Stivers. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney, for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
Despite my reputation, I would like to focus for a few
minutes on some things that we might be able to agree on. I
recognize, in fact, my colleague Mr. Green asked if anybody
wanted to completely get rid of the bill, and I think we would
be kidding ourselves if we think that everybody agrees that
things are perfect and we shouldn't change anything. It may be
that some want to change it dramatically, and some want to
change it only slightly. But let us see if we can at least
figure out that some of the concerns raised here today are
things that everybody can agree on might need some work in the
future.
So, Professor Johnson, I am going to spend some time with
you because you are the Democratic witness, and I am going to
read off some of the things that Mr. Bentsen spoke about in his
opening statement and just see if we can't get some agreement
on what the regulators should do going forward.
You said in order to lessen the potential negative market
impacts, regulators should consider as issues arise giving
particular markets or products additional time to comply. Is
that a fair consideration?
Mr. Johnson. I'm sorry, Congressman, you are speaking a
little fast. Additional time to comply?
Mr. Mulvaney. I am a Southerner. Usually, I get accused of
speaking slowly. Yes.
It says that as new information becomes available,
regulators should consider as issues arise giving particular
markets or products additional time to comply.
Mr. Johnson. I think given what we know now, there is
sufficient time to comply. There is a long phase-in of this. If
additional issues come up, like the TruPS preferred, of course
they have to be dealt with. That is sensible.
Mr. Mulvaney. And it says--and, again, I don't expect noes
to a lot of these. I am not trying to bait you or trick you, I
am just trying to establish that there might be some things
going forward, and I believe you yourself at the beginning of
the testimony said that as we deal with unintended
consequences, they should deserve our attention.
He also said that just as the five regulators ultimately
coordinated to write one rule, they must now coordinate and be
consistent in the interpretation, examination, supervision, and
enforcement. That makes sense, doesn't it?
Mr. Johnson. I already said, Congressman, I think it is a
very good idea, and I think that you should look to the FSOC
and the Secretary of the Treasury to ensure that coordination
takes place. That is their job under the legislation.
Mr. Mulvaney. He went on to say that it was true that we
did not task any one agency or the agencies collectively with
interpretation and examination. That is something we need to be
focused on moving forward, correct?
Mr. Johnson. Absolutely. Personally, Congressman, I would
prefer having a single banking regulator in the United States.
Mr. Funk already has to deal with two banking regulators and
the SEC. It is very--three banking regulators, my apologies,
and the SEC. That is way too complicated already, but that is a
century-old problem in the United States.
Mr. Mulvaney. And that goes on to another point he raises,
which is what happens if the SEC gives one rule and the OCC
gives another, or the FDIC gives one rule, or the Federal
Reserve gives another. That is something that needs to be
fixed, or at least needs to be watched as we go forward.
Mr. Johnson. Absolutely. That is the responsibility of the
FSOC and the Secretary of the Treasury.
Mr. Mulvaney. I understand. He says it is completely
unclear how the agencies plan to coordinate their efforts and
avoid duplicative actions and undue costs and burdens on
virtually every banking organization in the country. Another
legitimate concern, correct?
Mr. Johnson. They certainly haven't told me how they plan
to deal with it, but I would turn to the FSOC. That is their
job, and I am sure they will come and testify before you at
every opportunity.
Mr. Mulvaney. And finally, without beating a dead horse too
much, he said that the top near-term goal should be for the
agencies to articulate a transparent and consistent roadmap for
coordination on both near-term interpretive guidance and long-
term examination and supervisory framework. A valid concern,
correct?
Mr. Johnson. It is a concern not just for the Volcker Rule:
all of regulation and supervision should be subject to the same
high standard. And I think the FDIC sets world-class standards
for many or most of its activities in this regard.
Mr. Mulvaney. And very briefly, before I move on to Mr.
Funk, I want to ask you one question about your testimony where
you spoke to--for the line, you said over the last 20 years and
since the onset of the financial crisis, the financial system
has become dramatically--excuse me, ``dramatically'' is not in
there--has become more concentrated.
I take it from the tenor and how it appears in your text
that you consider that to be a bad thing or a potentially bad
thing; is that correct, Professor Johnson?
Mr. Johnson. I'm sorry. Say the question again?
Mr. Mulvaney. This is your testimony. Over the past 20
years and since the onset of the financial crisis in 2007, the
financial system has become more concentrated. I take it you
perceive that as being a potential negative impact?
Mr. Johnson. Unfortunately, the increasing concentration
has come with some very big negative consequences, including
the one currently spread on the board.
Mr. Mulvaney. Is it fair to say then that if we see as an
unintended consequence of the Volcker Rule even more
consolidation, or, more broadly, if Dodd-Frank drives more
consolidation, that is something that is potentially dangerous
to the market, and we should look at that from a regulatory
standpoint?
Mr. Johnson. I would be concerned about increased
consolidation and concentration irrespective of the cause,
including from any kind of legislation. Yes, Congressman.
Mr. Mulvaney. Thank you, Professor Johnson.
Finally, Mr. Funk, you said something today that I just
want to clarify, because I live in a district similar to Mr.
Hurt where community banks make up a large portion of our
financial markets. And what you told me was, yes, you are
technically not covered by this, but you really are, because in
2 years from now, you are going to have to prove that what you
are doing doesn't fall under the Volcker Rule, is that correct?
So in essence you are required to meet some of the same
compliance regulations, even though Dodd-Frank specifically
says Volcker is not supposed to apply to you?
Mr. Funk. I think there are a lot of questions in our
investment portfolio that we don't have answers for right now,
and I am speaking for all banks right now. And the answer is,
we don't know.
Mr. Mulvaney. And even going forward, though, if you are
going to make a trade or investment, you are going to have to
establish for somebody that it doesn't fall under Volcker.
Mr. Funk. It depends if it is considered proprietary
trading or not, and we don't engage in proprietary trading, nor
do most banks.
Mr. Mulvaney. Thank you, sir.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman. Thank you so much
for holding this hearing and the second one to follow up. And
thank you all for being here.
This is obviously a very important topic, one that I have
heard so much about in the last few weeks, especially from my
community banks back in my district. There is a great amount of
fear, a great amount of concern, and a lot of uncertainty. It
is very complex. So I have to apologize even with my questions
that they are very diverse, because this rule is very diverse
and very complex.
Mr. Bentsen, I wanted to address this first to you.
Regarding the tender option bond market, the regulators clearly
share the concern and stated in the preamble that disruption of
the tender option bonds market could increase financing costs
to municipalities. Does it seem possible that TOB's market may
continue functioning fluidly with some adjustments to comply
with the Volcker Rule? I wonder if you can talk about this
process and how SIFMA and industry are thinking through this
challenge.
Mr. Bentsen. Congressman, thank you for that question. We
are quite concerned with the rules--final rules treatment for
tender option bonds or the lack of an exclusion for tender
option bonds. They are an important tool for the municipal
financing market, and we think, absent some solution, it will
have a negative impact on municipal issuers ultimately.
The industry is looking at the rule and seeing if there is
a way to work through it that would meet regulators' concerns.
We don't have an answer yet, but it is something that is a top
priority for us.
Mr. Hultgren. Quickly, I wonder, how would you compare--Mr.
Bentsen as well--these tender option bonds to municipal
securities and trades involving repurchase agreements?
Mr. Bentsen. We view them as, frankly, similar to a
repurchase agreement. They are like a securities financing
transaction. They provide liquidity to the muni bond market.
They provide inventory financing. That passes through to the
pricing of the muni bond market to the benefit of the muni
issuer.
Mr. Hultgren. Mr. Funk, I want to address this to you, if I
may. First, one of my great frustrations--I talk about it often
in this committee--is that under the guise of consumer
protection, many new rules have come out which actually end up
costing consumers. I wonder briefly, you have mentioned how
people have been shifted around. Your head count has stayed the
same, but you are doing probably less outreach and customer
service, and more compliance.
I wonder what you think maybe the biggest impact would be
for your customers from the Volcker Rule or from some of these
other rules that have significant costs more than benefit.
Mr. Funk. Just with the Volcker Rule, that is hard to say,
because there is so much we don't know. I was prepared, had the
TruPS issue not been answered, to talk about that. But beyond
that, the effect on community banks, I think we just are
waiting to find out. And there are many things that we don't
know yet that probably in the next 30 to 60 days we will find
out.
Mr. Hultgren. Mr. Funk, I want to follow up on that. Many
banks are not waiting until July 2015 to divest themselves of
Volcker-prohibited securities. For example, BankUnited in
Florida, prompted by the rule, has already sold off their CLO
and re-REMIC portfolios. But in the case of re-REMICs, the
status of these securities under the rules seem unclear, as
many other areas are unclear as well. Am I correct in saying
that there is some confusion in the marketplace regarding re-
REMICS as well as some of these other areas?
Mr. Funk. I am not an expert on re-Remics. We can certainly
get back for the record, but I am not an expert on re-Remics.
Mr. Hultgren. Anybody else have a comment quickly? Mr.
Bentsen?
Mr. Bentsen. We would be happy to get back to you for the
record.
Mr. Hultgren. Okay. Thanks. We will follow up with you.
The last question, and I would open this up, Mr. Funk, Mr.
Bentsen, Mr. Robertson, and if any of you have any thoughts, on
a broader note, when banks are forced to sell certain
investments like TruPS, CDOs, re-REMIC securities, won't this
create a buyer's market? These institutions forced to comply
with the Volcker Rule will have to sell prohibited investments
and potentially take a significant loss. This will be
exaggerated in less liquid markets where we may see greater
volatility. Isn't that true?
And I wonder, since the regulators did not perform any
significant economic analysis on the final rule, are there any
estimates from the bank supervisors as to what the impact of
conformance may be on our community banks financially, their
bottom lines, and how this will affect the market for
individual securities deemed covered funds?
So in the last minute or so, I would love to hear if any of
you have any thoughts on that. My thought is, if big banks, if
the larger institutions are impacted, the whole market will
feel the ripple effects from it. So, Mr. Bentsen, Mr. Funk, Mr.
Robertson, I wonder if you have any thoughts on that?
Mr. Bentsen. Congressman, I would just say that any time
you create a fire sale situation, having to dump assets onto
the market and depress the price, that is going to ripple
through the whole system.
Mr. Funk. And I think we had established it was a net of
$600 million on the TruPS issue, but fortunately we have taken
care of that. We haven't resolved the CLO issue or any of the
other issues that we don't think are systemically risky
investments that banks may be forced to mark to market and
ultimately sell.
Mr. Hultgren. The last 10 seconds, any way--again, we care
about you, we want you to do well, but we really want your
customers to do well. So the more you can tell us of real
impact on your customers in the next weeks and months, the
better.
With that, I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentlelady from Missouri, Mrs.
Wagner.
Mrs. Wagner. Thank you, Mr. Chairman, for this hearing.
Mr. Funk, as the Congresswoman from St. Louis, Missouri, I
must tell you I have a great love of Midwestern banking
institutions.
So I was looking at your testimony and was quite interested
here, especially the section that talked about--and Mr.
Hultgren spoke of it, too, a little bit--a trade-off between
resources devoted to compliance management and customer
engagement; of course, the reduction of resources for that kind
of fine engagement, given the fact that you are spending so
much money on compliance issues, and the impact that this has
on growing your business, and obviously costs and access for
your customers and clients.
So I have a couple of very elementary and quick questions
here. Can you have a prosperous community without prosperous
financial institutions?
Mr. Funk. When I was the chairman of the Iowa Bankers
Association in 2010 and 2011, and I would go around our State
and I would give various talks, there was always one statement
in every talk I made, and that was that we have a great State,
but in every what you would call strong community, there is at
least one, if not two or three, strong community banks. So I
think it is almost impossible to have a strong community
without strong community banks.
Mrs. Wagner. Absolutely. And who helps create more jobs,
profitable banks or unprofitable banks?
Mr. Funk. Is that a question?
Mrs. Wagner. Yes, sir.
Mr. Funk. If the unprofitable banks still have capital, and
they are still in operation, then they still help create jobs.
Mrs. Wagner. Thank you for your input and answers.
Mr. Bentsen, I am sure that you are aware, sir, that SEC
Commissioner Dan Gallagher is very critical of the entire
process that went forward here, particularly with regard to the
SEC taking what he called a back seat, frankly, to the banking
regulators, who do not have expertise in securities trading. In
his dissenting statement, Commissioner Gallagher at the time
noted that, ``this kind of interference is the product of an
idealistic and ideological book club mindset unburdened by the
knowledge of how complicated it is to establish and oversee
regulatory programs.''
Mr. Bentsen, in your opinion, was it a good idea for the
banking regulators to take the lead role in drafting the
Volcker Rule?
Mr. Bentsen. That is a good question and a difficult
question. I think Commissioner Gallagher is absolutely correct
as it relates to the SEC's role as the market regulator. It
underscores the problem really in the legislative text itself
of what Volcker was trying to accomplish, and that is why in my
statement I said, basically on its face it looks relatively
simple, but in practice it is exceedingly complex. And that is
proven out in the final rule itself. It cuts across so many
different markets.
Our concern has always been that you can't have five or six
or seven, if you add the National Futures Association, as
Chairman Royce did. You have to have somebody in charge.
Mrs. Wagner. Further to that, though, because I am
concerned about the banking regulators taking the lead here,
and one area where I think the SEC could have provided
expertise is on articulating the differences between market-
making and proprietary trading. Do you believe the banking
regulators have, in fact, a deep understanding of the
differences between these two activities?
Mr. Bentsen. I think we hope through this process that the
regulators went through to get to the final rule that the SEC's
experience in market regulation came through. But I think it is
going to be and should be an iterative process as we go through
the implementation that we see how it is really going to work
out, how the metrics are going to work, how the metrics are
going to be used, how each agency is going to look at them.
Hopefully, there is a uniform application of them. That is
going to be important, and the SEC is going to have to play a
major role.
Mrs. Wagner. I have limited time, but I will say this: The
major role of the SEC is important. And let me just ask you
this: Should the SEC have, in fact, been more involved in the
drafting of Volcker, do you believe?
Mr. Bentsen. Congresswoman, I, frankly, don't know what
went on behind the scenes among the regulators. We weren't
invited to those meetings. But we certainly engaged with the
SEC, as we did with all the regulators, as is our right and
responsibility.
Mrs. Wagner. And you talked about it a little bit, the five
different mandates, five different regulators, Mr. Bentsen. In
your opinion, is there any way for the regulators to apply one
consistent method of enforcing Volcker when they each have a
different mandate and a different approach to regulating?
Mr. Bentsen. Oh, I certainly think that they could. I
certainly think that they could get together and figure out how
to come up with a uniform examination process, a uniform use of
metrics, compliance and enforcement regime.
Mrs. Wagner. I believe my time has run out, Mr. Chairman.
Chairman Hensarling. The time of the gentlelady has
expired.
Speaking of time, there appear to be two more Members to
ask questions. I thank the panel again in advance for their
patience and endurance.
The Chair now recognizes the gentleman from Florida, Mr.
Ross.
Mr. Ross. Thank you, Mr. Chairman.
And I will probably be pretty brief, but it is interesting,
as we sit here and talk about the Volcker Rule, and I think
history will reflect that probably the most significant part of
the Volcker Rule in terms of its import on the markets has been
the anticipation of its implementation.
Because leading up to the rule actually being released and
now as we debate its implementation, we have seen, as some of
my colleagues have pointed out, the divestiture of Volcker-like
trading, proprietary trading. But now we are on the cusp of
seeing what happens from a theoretical perspective of trying to
eliminate proprietary trading to the practical application of
the rule.
And, Mr. Bentsen, you have explained some of this in your
opening statement and you have raised this and some of my
colleagues have talked about it, in terms of when you have
conflicts between any one of the regulators.
And my question, first question to Mr. Bentsen is, have the
regulators given you any clarity as to how they are going to
resolve conflicts and opinions as to the application of the
Volcker Rule?
Mr. Bentsen. No.
Mr. Ross. None whatsoever.
Mr. Bentsen. Not yet, no.
Mr. Ross. Would that not be somewhat significant at this
juncture as someone in your position as to what to anticipate?
Mr. Bentsen. I think that really should be their next step.
I think they need to--and I think trust preferreds is a good
example. I think Mr. Ganz raised it about having to go see five
regulators.
Mr. Ross. And, Mr. Ganz, I appreciate your background in
this, and I wonder if you could speak to the difficulty of
complexities of the legal complications of having the conflicts
in rulings between regulators and whether there is any recourse
or due process for those who are affected by it.
Mr. Ganz. It has been very difficult to deal with the
interagency issue. We have been focusing mostly on the Volcker
Rule and on risk retention. And, in each case, it is either
five or six agencies, and there is no real roadmap.
Mr. Ross. And there is no due process. If a trader needs to
appeal a ruling that is adverse to their position, but yet
another regulator has sided with them, you are damned if you do
and you are damned if you don't. Quite frankly, that is a very
unusual situation to be in.
Mr. Ganz. It is not easy.
Mr. Ross. Okay. I appreciate that.
Back to market-making, I think there is an ambiguous area
where I think we are going to have probably more hard times
trying to wrestle with as time goes on. Because I think you
have to look at trend analysis, but it gives such a great deal
of discretion to the regulators to determine whether there has
been an investment based on market-making or, rather, just for
self-serving proprietary trading.
In fact, Jones Day in their initial reaction to the rule
stated that, ``troublesome questions include the effects and
consequences of a change, sudden or otherwise, in these
reasonably expected near-term demands or in market cycles in
times when market-making can be suspended.''
Back to you, Mr. Bentsen. Have the regulators given any
guidance as to what will constitute market-making?
Mr. Bentsen. Congressman, in the final rule itself, they
certainly lay out the compliance framework and systems that
they expect the firms to use, including the metrics, and what
they will rely upon.
What is not clear is whether they will rely upon them
uniformly or across five different jurisdictions. And it is not
clear how these will work. Obviously, we will have to go
through that process.
Mr. Ross. And as a litigator, I can only say that this is a
wonderful thing for my profession, because it will be a relief
act for those out there trying to help interpret what the
application will be among several agencies.
Finally, I want to talk briefly about the investment in
sovereign debt. I think when these regulations are being
decided upon, there must be a consensus that there is infinite
capital out there. And I think we can all agree that there is a
finite amount of capital and that capital will seek the path of
least resistance and the highest rate of return.
And now that we have allowed for the investment in
sovereign debt, what I foresee--and, Professor Johnson, I want
to get your opinion on this--is that capital will leave the
domestic market and go to foreign investments, because there is
no need to prove that you are innocent before guilty by way of
the Volcker Rule, and instead you can invest in sovereign debt
and not have to worry about investing in domestic trades.
What is your opinion about that?
Mr. Johnson. No, I don't think that is correct,
Congressman. Obviously, investors are looking at risk, they are
looking at returns, they are looking at a strong, rebounding
U.S. corporate sector. There are a lot of concerns, legitimate
concerns, about sovereign debt around the world. And those are
the primary drivers of market attention to trends.
Mr. Ross. I agree with you, market trends can be analyzed
over time, and they can be forecast based on that. But the one
element that I think happens to be hardest to manage is the
impact of regulatory involvement. And I think that is what we
are going to see with the Volcker Rule when I, as a banker, now
have to prove that I am innocent until proven guilty. And
instead of going through that compliance, instead of going
through that regulatory morass of having to prove my innocence,
I would rather invest my assets on behalf of those whom I have
a fiduciary duty to into foreign debt. And I think that is what
we are going to see happen.
And I realize my time is up, and I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman.
And I thank the panel for your patience in putting up with
us today. I think I am the last one.
During this hearing, someone referred to a GAO study on
proprietary trading. On page 22, the GAO stated that, ``staff
at the financial regulators and the financial institutions we
interviewed also noted that losses associated with lending and
other risky activities during the recent financial crisis were
greater than losses associated with standalone proprietary
trading. For example, one of the firms reported increasing the
reserves it maintains to cover loan losses by more than $14
billion in 2008, and another of the firms increased its loan
loss reserves by almost $22 billion in 2009. Further, FDIC
staff, whose organization oversees bank failures, said they
were not aware of any bank failures that had resulted from
standalone proprietary trading.''
Mr. Funk, do you agree with the GAO that proprietary
trading was not the cause of the financial crisis?
Mr. Funk. I would say proprietary trading might be a small
part of the financial crisis, but I would agree, I think it is
not the sole cause by any stretch of the imagination.
Mr. Rothfus. And the GAO states that other activities like
mortgage lending were associated with greater losses to the
banks. Wasn't the financial crisis really brought on by
government-mandated policies that paved the way for the
loosening of lending standards?
Mr. Funk. That might be a part of it, but I think it is a
long list that caused our financial crisis.
Mr. Rothfus. Mr. Robertson, as we become better educated
about the Volcker Rule and the American people become better
educated about the Volcker Rule, did the Volcker Rule leave in
place the ability for banks to hold for their account any
securities?
Mr. Robertson. They can certainly hold securities as
investments for sale--or, excuse me, to hold as investments. It
does not allow them to have a trading portfolio in instruments.
Mr. Rothfus. So, educate me on a proprietary trade. Can
they buy a Treasury?
Mr. Robertson. They can hold a Treasury.
Mr. Rothfus. Could they buy a paper issued by Fannie Mae or
Freddie Mac?
Mr. Robertson. They could buy paper from Fannie Mae and
Freddie Mac.
Mr. Rothfus. The same Fannie and Freddie Mac that had
hundreds of billions of dollars of taxpayer--that we bailed
out.
Mr. Robertson. Exactly. And, to your earlier point, if you
look at the anatomy of the financial crisis, it was a mortgage-
driven crisis.
Mr. Rothfus. So we have banks that are able to hold
Treasuries. Now, we have gone through this quantitative easing
for a considerable amount of time. Has that suppressed interest
rates, the quantitative easing?
Mr. Robertson. Oh, absolutely.
Mr. Rothfus. And what happens when we unwind the
quantitative easing? Would you expect to see interest rates go
up?
Mr. Robertson. Absolutely, and hopefully alongside
continued economic recovery.
Mr. Rothfus. And when the interest rates go up, all these
banks are holding the Treasuries, what happens to the principal
value of Treasuries?
Mr. Robertson. Obviously, if they are in extended maturity,
they will decline.
Mr. Rothfus. Okay.
So we have established that banks are able to hold some
securities--Treasuries, Fannie and Freddie paper, securities
like that. Are we concentrating the types of securities, then,
that banks can hold?
Mr. Robertson. We are definitely putting restrictions
around how they can manage those portfolios. So if we have a
bank making a loan to a private middle-market company, that is
a financial instrument on its balance sheet with risks. And
banks take on all kinds of risk on behalf of corporate clients.
To the extent that they manage those prudently, they make
money, and the system is fine. To the extent that we impose
constraints that are not constructive on how they manage those
financial risks, we actually impair the ability for risk to be
managed.
Mr. Rothfus. This is for Mr. Bentsen and Mr. Robertson. The
regulators have backtracked on the TruPS issue with what we saw
just yesterday. Does this support the conclusion that the
regulators erred in not promulgating a second proposed rule or
an interim final rule?
Mr. Bentsen. We believe that they should have done a
reproposal, because the initial proposal was very much like a
concept release. It had 1,300 questions in it. Clearly, the
regulators were struggling to figure out how to write a very
complex rule off of the legislative text, and a reproposal
would have been beneficial to the process. They chose not to do
that, they chose not to do an interim. So we are left with the
final, so we have to work with that.
Mr. Funk. Could I add to that?
Mr. Rothfus. Yes.
Mr. Funk. If I could add to that, there has been a lot of
discussion today about, you had 18,000 comments, you had 3
years to make comments. We always make comments on issues we
know about, and the TruPS issue was something that was
completely unforeseen.
And the regulatory agencies, in our opinion, need to signal
what they are going to regulate a little bit more, because this
whole thing with the TruPS never would have happened had it
been part of the comment period. I am confident it would have
been worked out.
Mr. Rothfus. I thank the chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
Again, I wish to thank our witnesses for their testimony,
their patience, and their endurance.
Without objection, I would like to enter into the record
letters from the Independent Community Bankers of America, and
the American Association of Bank Directors. Without objection,
it is so ordered.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing stands adjourned.
[Whereupon, at 1:15 p.m., the hearing was adjourned.]
A P P E N D I X
January 15, 2014
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