[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF THE VOLCKER RULE
ON JOB CREATORS, PART II
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 5, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-62
______
U.S. GOVERNMENT PRINTING OFFICE
88-524 WASHINGTON : 2014
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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:
February 5, 2014............................................. 1
Appendix:
February 5, 2014............................................. 65
WITNESSES
Wednesday, February 5, 2014
Curry, Hon. Thomas J., Comptroller of the Currency, Office of the
Comptroller of the Currency.................................... 11
Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance
Corporation.................................................... 12
Tarullo, Hon. Daniel K., Governor, Board of Governors of the
Federal Reserve System......................................... 8
Wetjen, Hon. Mark P., Acting Chairman, Commodity Futures Trading
Commission..................................................... 14
White, Hon. Mary Jo, Chair, U.S. Securities and Exchange
Commission..................................................... 9
APPENDIX
Prepared statements:
Moore, Hon. Gwen............................................. 66
Curry, Hon. Thomas J......................................... 67
Gruenberg, Hon. Martin J..................................... 80
Tarullo, Hon. Daniel K....................................... 98
Wetjen, Hon. Mark P.......................................... 105
White, Hon. Mary Jo.......................................... 110
Additional Material Submitted for the Record
Ellison, Hon. Keith:
American Banker article by Donald R. van Deventer entitled,
``Volcker is Right. Prop Trading Kills,'' dated February
20, 2012................................................... 118
Curry, Hon. Thomas J.:
Written responses to questions submitted by Representatives
Garrett, King, Ross, Fincher, Hultgren, Hurt, and Ellison.. 121
Gruenberg, Hon. Martin J.:
Written responses to questions submitted by Representatives
Garrett, Ellison, Luetkemeyer, Hurt, Hultgren, Fincher,
Ross, and King............................................. 132
Tarullo, Hon. Daniel K.:
Written responses to questions submitted by Representatives
Fincher, Garrett, Hultgren, Hurt, King, Moore, and Ross.... 148
White, Hon. Mary Jo:
Written responses to questions submitted by Representatives
Hurt, Garrett, King, Ross, Fincher, and Hultgren........... 165
THE IMPACT OF THE VOLCKER RULE
ON JOB CREATORS, PART II
----------
Wednesday, February 5, 2014
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Capito, Garrett, Neugebauer, McHenry, Pearce, Posey,
Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Mulvaney,
Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, Rothfus;
Waters, Maloney, Velazquez, Sherman, Meeks, Capuano, Lynch,
Scott, Green, Cleaver, Ellison, Himes, Peters, Carney, Foster,
Kildee, Murphy, 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.
This hearing is entitled, ``The Impact of the Volcker Rule
on Job Creators, Part II.'' Members will recall that Part I was
held on January 15th, when we heard from our private sector
witnesses. Today, we will hear from the regulators who
promulgated the rule.
I now recognize myself for 5 minutes for an opening
statement.
During our last Volcker Rule hearing, I mentioned receiving
correspondence from a constituent of mine, Joseph of Mabank,
Texas, who wrote me, ``I am a disabled veteran. I have been
without work for over a year. All I want is to have a good
paying job.''
I receive way too many letters like this from folks like
Joseph who are struggling to make ends meet, struggling in this
struggling economy. There is William, who lives in Ben Wheeler,
who says, ``I have been out of work for the longest time, since
my teenage years.'' Tina from Canton wrote me, ``I haven't been
able to find a job suitable for my family's needs.''
I do not recall a time, ever in my lifetime, when the
challenges of upward mobility and economic opportunity for low-
and moderate-income Americans have been greater. Not
surprisingly, I also do not ever recall in my lifetime when the
regulatory red tape burdens on our job creators in capital
markets have been greater. I believe, as do most, that there is
a clear, direct causal link between the two.
Today's exhibit: the 932-page complex, confounding,
confusing, and convoluted Volcker Rule. Like most of the other
400 rules in the Dodd-Frank Act, the Volcker Rule is aimed at
Wall Street, but hits Main Street, and regrettably people like
Joseph and William and Tina have become collateral damage.
The Volcker Rule, I believe, remains a solution in search
of a problem. Of the 450 financial institutions that failed
during or as a result of the financial crisis, not one fell
because of proprietary trading. In fact, financial institutions
that varied their revenue streams were better able to weather
the storm, keep lending, and support job growth.
Instead, bank failures, as we all know, came largely from a
concentration in lending in the poorly underwritten residential
real estate and sovereign debt markets. And who helped steer
them into these markets? Regrettably, Washington. Between
Fannie Mae and Freddie Mac's affordable housing goals, the CRA,
and our SRO designations, just to mention a few, Washington
regulators regrettably incented and blessed it all.
The great public policy tragedy of the financial crisis was
not that Washington failed to prevent the crisis, but instead
that Washington helped cause it. Now, with the Volcker Rule,
Washington is doubling down on its catastrophic mistakes.
With something as large, momentous, and as anticipated as
the Volcker Rule, surely it must offer great benefits to our
financial system. But what are they? Paul Volcker himself has
said that proprietary trading was not a central cause of the
crisis. Former Treasury Secretary Geithner has expressed a
similar view. And I am unaware of any economist or regulator
who has been able to quantify precisely the Volcker Rule's
benefits.
Many say the rule reduces risk in the financial system.
That may be true. The studies that I have seen are mixed at
best. And I remind everyone that without risk, there is no
investment. Less investment means less capital formation. Less
capital formation means fewer job opportunities for Joseph,
William, and Tina, and the tens of millions who remain
underemployed and unemployed in this economy.
If Washington believes we need to remove more risk from the
system, perhaps then we should concentrate on substantially
outlawing mortgage risk, which is at the epicenter of the
crisis, but arguably the CFPB's QM rule has largely
accomplished that already.
As the benefits of Volcker remain questionable, evidence is
mounting that the cost will be enormous. There have been 18,000
comment letters, the vast majority of which have been negative,
that ultimately the rule will be costly to hard-working
American taxpayers. The Public Utility Commission in my native
Texas has warned that the Volcker Rule threatens my
constituents with ``higher and more volatile electricity
prices.''
Then there are the regulators' own estimates which show
that complying with Volcker will require 6.2 million hours.
That is hours in capital which could have been devoted to
growing our economy and creating more jobs. There is research
out of Washington University that Volcker will take $800
billion out of our economy, the equivalent of $6,900 out of
every American household's paychecks. There is ample testimony
before our committee that companies will be faced with
artificially higher borrowing costs and will be forced to hoard
more cash.
As the evidence has mounted, The Wall Street Journal has
editorialized that the Volcker Rule creates ``a limitless
supply of ambiguity.'' And The Economist has stated that the
rule gives us ``less liquid markets, higher transaction costs,
a weaker financial system, and, as usual, richer lawyers.''
Based on the evidence, it appears that the costs outweigh
the benefits, but the regulators who promulgated the rule don't
know for certain because none of the agencies conducted a cost-
benefit economic analysis. In other words, they did not examine
whether the Volcker Rule actually helps or hurts Joseph,
William, Tina, or any of the others. Some say we need the
Volcker Rule to hold Wall Street accountable. Wall Street must
be held accountable, but Washington must be held accountable as
well.
Wall Street is going to make money with or without the
Volcker Rule. It is Americans on Main Street, the people who
sent us here, who are being hurt daily in the regulatory
tsunami of Obamacare, Dodd-Frank, and now the Volcker Rule.
This committee and this Congress must and should do better.
The Chair now recognizes the ranking member, Ms. Waters,
for 4 minutes.
Ms. Waters. Thank you, Mr. Chairman.
I would like to welcome our distinguished witnesses to
today's hearing and thank them for working tirelessly to
complete this crucially important rule. Thanks to their hard
work, we are making progress toward a stronger, sounder
financial system. It has been 5 years since the worst of the
financial crisis. Our Nation is still taking stock of the
causes and the damage done. Though we can't identify every
cause of the crisis with absolute certainty, we do know that
certain types of risky behavior were major contributors.
One of these types of behavior was proprietary trading by
big banks, of which we saw a significant increase in the
buildup to the collapse. In fact, at the biggest banks,
proprietary trading revenues steadily increased in the lead-up
to the crisis as banks acquired massive positions in subprime
mortgage-backed securities. These positions were tremendously
profitable until the music stopped and the market for these
securities crashed. And as we now know, losses from proprietary
trading, among other factors, required taxpayers to step in to
bail out the system.
After the worst of the crisis, Congress enacted
comprehensive Wall Street reform to ensure such an emergency
would never happen again. Undoubtedly, a centerpiece of that
reform was the Volcker Rule. I believe that a properly enforced
Volcker Rule will protect American taxpayers from the
consequences of risky bank behavior and make certain that banks
insured by our Nation's citizens get back to the core business
of making loans and financing our small businesses.
To our regulators who are here today, I commend you for
working together so closely to ensure we have the strongest,
most workable rule possible. During this important rulemaking,
you have sought feedback from stakeholders across the spectrum,
poring through tens of thousands of comments and holding dozens
upon dozens of meetings.
At the same time, you have already worked quickly and
effectively to address issues related to the rule that have
come up in the last month, including the issue related to
collateralized debt obligations (CDOs) backed by trust
preferred securities (TruPS).
I am very pleased with how you have managed to work
collaboratively across your agencies. And given that the strong
and consistent enforcement of the Volcker Rule is one of my top
priorities, I am even more pleased that you have formed a
working group which will allow your agencies to better
coordinate on implementation of the rule across the financial
sector.
My understanding is that your agencies have already begun
to work, holding an initial meeting to discuss coordination of
responses and supervision of financial institutions. This type
of cooperation is to be commended and is critical to ensuring
that the agencies' implementation of the Volcker Rule is
strong, coordinated, and effective.
Simultaneously, I hope that your agencies will take
advantage of the long lead-up time afforded to you to collect
data from banking entities which will inform how best to
coordinate enforcement.
I would like to once again thank the witnesses for
appearing before this committee today. I look forward to
working with you to ensure our regulators are faithfully
enforcing this rule, which is crucial to the success of the
Wall Street Reform Act.
I look forward to the witnesses' testimony, and I will
yield 30 seconds to the gentlelady from New York.
Mrs. Maloney. Thank you. And I thank the ranking member for
yielding.
And in all due respect to our chairman, I thank you for you
calling this hearing, but when you said that the Volcker Rule
is a solution in search of a problem, I would say that the
Americans who suffered a $16 trillion loss in our economy, the
loss of their homes, the loss of their jobs, and the loss of
their savings are grateful that Congress acted in a way to try
to prevent it in the future, and the Volcker Rule is an
important part of the Dodd-Frank reform bill.
Thank you for yielding.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, the Chair of our Capital Markets Subcommittee, for
2\1/2\ minutes.
Mr. Garrett. Thank you, Mr. Chairman.
Nearly 3\1/2\ years after enactment of Dodd-Frank, the
government's rulemaking assembly line continues to bury
American job creators with an avalanche of red tape. And so
today, we meet again to discuss yet another example of
government rulemaking gone wrong, the so-called Volcker Rule.
Instead of taking the time to address the causes of the
financial crisis, such as oversubsidization of the housing
market, and the Federal Reserve's failed regulatory monetary
policy, Congress does come up with a solution in search of a
problem: Exhibit A, the Volcker Rule, that tries to ban
proprietary trading, which did not cause the financial crisis.
And while the regulators here today had no choice but to
draft this rule, they appear to have made the situation worse
by failing to coordinate with each other and by ignoring the
legal requirements for agency rulemaking. For example, despite
receiving over 19,000 comment letters, and making significant
changes to the Volcker Rule, the regulators failed to repropose
the new rule for public comment. As a result, regulators are
already being asked to address, after the fact, a variety of
problems with the rule that threaten the ability of American
companies to grow and make jobs.
The regulators also failed to support the Volcker Rule with
an adequate economic analysis, as required by law. Without this
basic analysis, we really don't know the detrimental effect it
will have on the economy and those who invest in it. This is
simply unacceptable.
Another major concern is that banking regulators were very
selective and counterproductive in the use of safety and
soundness authority. They had no problem concocting a rationale
to exempt potentially very risky foreign sovereign debt that
could actually make banks less safe and sound, but they have
refused to use the same authority to exempt CLOs from the rule,
a move that actually makes them safer. Not to mention the fact
that Congress never intended for CLOs to be covered in the
first place.
Last, but not least, there is the apparent inability of the
regulators to cooperate and coordinate during this process,
with one news report indicating that regulators agreed to
negotiate the rule ``only when tempted by fast food fried
chicken.'' This, coupled with the agencies issuing a separate
release and setting different implementation deadline, raises
the troubling question of how the Volcker Rule is going to be
implemented and enforced in a rational and coherent manner.
All of this combined, Mr. Chairman, given all these
problems, I believe it is time to seriously consider
consolidating some of these agencies, perhaps creating a more
streamlined, efficient, and accountable financial regulatory
system.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Peters, for 2 minutes.
Mr. Peters. Thank you, Mr. Chairman.
And I would like to thank our witnesses for being here
today and for all of your work in overseeing our financial
system.
I was first elected in 2008, during the very height of the
financial crisis, and it was a very frightening time. Our
Nation was shedding over 800,000 jobs per month. In my home
State of Michigan, there were very real fears that this crisis
would bring about the liquidation of General Motors and
Chrysler. But now American automakers are creating jobs and are
boosting sales, and our financial regulators are implementing
the historic Dodd-Frank law, and our economy is growing.
We can't go backwards. We can't go back to allowing the use
of government-insured money to make highly speculative bets on
prior bets and then again on other bets. These highly complex
and speculative derivatives and other practices threatened the
entire financial system. We can't go back to shedding millions
of middle-class jobs because of Wall Street overreach.
American markets allocate capital more efficiently than
anywhere else in the world, and I look forward to hearing how
our regulators are balancing the need to protect investors
while maintaining robust access to capital for entrepreneurs.
I yield back my time.
Chairman Hensarling. The Chair now recognizes the
gentlelady from West Virginia, the Chair of our Financial
Institutions Subcommittee, Mrs. Capito, for 1\1/2\ minutes.
Mrs. Capito. Thank you, Mr. Chairman. And I want to thank
our witnesses for being here with us today.
Two months ago, the agencies testifying before our
subcommittee released the final Volcker Rule. Since the
announcement of the final rule, this committee's members have
been inundated with concerns about the effect this complex
rule--although the original intent of the rule was to limit
trading activities of the largest banks, the final rule is
having a measurable impact on Main Street businesses and
financial institutions. Shortly after the rule's release,
bankers in West Virginia reached out to me with concerns about
their ability to hold certain securities under the new rule.
They feared that the rule's requirement to divest certain
assets would force them to take immediate write-downs. This
would have had to occur within 2 or 3 weeks before the end of
the calendar year.
The agencies reacted and issued an interim rule on January
14th that provided some clarity on the ability of banks to
invest in collateralized debt obligations backed by trust
preferred securities. But questions still do remain. Although
this interim rule is a step in the right direction, the
majority of confusion could have been avoided if there had been
a public comment on this section of the rule.
No one discounts the complexity of the rule and the
probability that there would be significant unintended
consequences. Unfortunately, what we are left with is a
situation where the only way for the public to comment on these
policies is to file lawsuits or engage Congress. This is a
disservice to the rulemaking process and the public.
I urge the witnesses here today and the agencies they
represent to swiftly address these outstanding issues. And I
thank you for coming before the committee today.
Chairman Hensarling. The ime of the gentlelady has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott, for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman.
First of all, the Volcker Rule is very important. It does a
very important thing in terms of protecting proprietary
trading. But there is an area we need to look very carefully
at, and that is the handling of what are known as CLOs.
My understanding is that CLOs are products which help
provide large amounts of credit to small businesses. They are
debt securities, and they performed well through the greatest
financial crisis of our time, and they continue to perform
well. They are not toxic. They didn't cause the problem. Banks
bought this CLO debt because they were prudent investments
which offered a reasonable rate of return. And included among
these banks are numerous small and regional and community
banks.
But here is the rub in this: Because of interpretation of
the final rules of Volcker, of implementing Volcker, these same
banks could very well face a situation where they have to dump
$80 billion worth of this debt in a fire sale. If these banks
get 90 cents on the dollar back, we are talking about wiping
out $8 billion of bank capital only because of what is
conceived to be overly broad rulemaking.
So it is my hope that in this discussion today we can have
a clear understanding of the interaction of CLOs, why this is
taking place, and how we can exercise the situation so that it
helps our financial system and not put it in sort of a
straightjacket here.
Thank you, Mr. Chairman.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, the Chair of our Oversight and Investigations
Subcommittee, for 1 minute.
Mr. McHenry. In the last 3\1/2\ years, mounting evidence
affirms that Dodd-Frank's more than 400 rules continue to miss
the mark. At its core, Dodd-Frank irresponsibly disregards the
causes of the financial crisis, namely, Fannie and Freddie,
failed prudential regulation, and off balance sheet vehicles.
Also, instead of explicitly implementing regulations which not
only codified Dodd-Frank's taxpayer-funded bailouts, but also
recklessly impeded our economic growth and our international
competitiveness.
In December, the hasty implementation of the Volcker Rule
upheld Dodd-Frank's dangerous reputation when all five
regulators refused to subject the rule to rigorous economic
analysis. By refusing to repropose the rule, the Obama
Administration and the regulators here today at this hearing
have gambled on an economically unproven rule that does not get
to the root of the last financial crisis and may, in fact, be
at the root of the next one.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison, for 2 minutes.
Mr. Ellison. Thank you, Mr. Chairman.
I want to congratulate you, the regulators, for your
outstanding collaborative and collective effort to implement
the Volcker Rule. It is a major step toward ensuring that
Americans will not be called upon again to repeat expenditures
like the Troubled Asset Relief Program (TARP).
TARP was a $700 billion investment which was passed in
2008. It buoyed more than 800 financial institutions during the
financial crisis. The Volcker Rule will also stop high-risk
investment trading, such as JPMorgan Chase's (JPMC's) London
Whale, the enormous investment by JPMC's investment division,
which resulted in the loss of more than $6 billion.
The creation of the new traffic laws for Wall Street is
complicated, and we must all pay attention to your regulatory
agencies' move forward with implementation and enforcement. I
strongly support robust regulation, which means that I want to
see greater funding for the SEC and the Commodity Futures
Trading Commission (CFTC).
Of course, I urge our regulators here to be open and
receive comment, as you so amply have. But I appreciate your
efforts over the past few years to improve the rules of the
road for the financial markets to reduce volatility and
generate economic activity. You have achieved this in your
balanced and clear rule.
And I want to say that for the many people who act as if we
did not have a catastrophic financial crisis just a few years
ago, and behave as though you just started writing rules all on
your own accord, I sympathize with the frustration you must
feel with that. But at the end of the day, I think we have a
safer financial system because of the efforts that you have put
forward. Thank you.
Chairman Hensarling. The gentleman yields back.
Today, we welcome the heads of the five regulatory agencies
that have developed, promulgated, and voted to approve the
Volcker Rule. First, the Honorable Daniel Tarullo, who is a
Governor on the Board of Governors of the Federal Reserve
System, a position he has held since 2009. Previously, he
served as a professor of law at Georgetown, and a senior fellow
at the Council of Foreign Relations and the Center for American
Progress.
The Honorable Mary Jo White currently serves as the Chair
of the U.S. Securities and Exchange Commission, a position to
which she was confirmed last April. Before that appointment,
Ms. White served as the U.S. Attorney for the Southern District
of New York.
The Honorable Thomas Curry was sworn in as the Comptroller
of the Currency in April of 2012. Prior to his service at the
OCC, Mr. Curry served as a Director of the FDIC, and he is
chairman of the NeighborWorks America board of directors.
Martin Gruenberg is the Chairman of the Federal Deposit
Insurance Corporation, a position he has held since 2012. We
welcome him back to Capitol Hill. He previously served on the
Senate Banking Committee for Senator Sarbanes, clearly not as
prestigious as having served as a staffer on the House
Financial Services Committee, but we welcome you back to the
Hill nonetheless.
Last, but not least, Mark Wetjen currently serves as the
Acting Chairman of the Commodity Futures Trading Commission. He
has been a CFTC Commissioner since October 2011. We welcome him
back to the Hill, as well. He too bears the burden of being a
former Senate staffer of the Senate Banking Committee.
Without objection, each of your written statements will be
made a part of the record. Each of you should be familiar with
the system of our green, yellow, and red lighting system. I
would ask that each of you observe the 5-minute rule.
Mr. Tarullo, you are now recognized for a 5-minute summary
of your testimony.
STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Tarullo. Thank you very much. Chairman Hensarling,
Ranking Member Waters, and members of the committee, I
appreciate the opportunity to testify on the final interagency
regulation implementing the Volcker Rule.
With respect to this and all other provisions of the Dodd-
Frank Act, the goal of the Federal Reserve is to implement the
statute in a manner that is faithful to the language of the
statute and that maximizes financial stability and other social
benefits at the least cost to credit availability and economic
growth.
The basic approach of the final rule is generally
consistent with that adopted in the proposed rule. But the many
comments we received helped us make useful changes and
clarifications throughout the final rule. Also, of course, the
London Whale episode allowed staff to test the procedural and
substantive requirements of the proposed rule against a real-
world example of what should not happen in a banking
organization.
The final rule has been modestly simplified from the 2011
proposal, particularly the portion dealing with proprietary
trading. Much of the remaining complexity lies in the parts of
the rule dealing with covered funds, which are driven largely
by the specific requirements of the statute.
Because the proprietary trading part of the regulation
tries to steer a middle course between one-size-fits-all
requirements on the one hand and very specific requirements for
all kinds of covered activity on the other, implementation will
be particularly important in continuing to shape the Volcker
Rule. We have extended the conformance period until July 2015
so as to allow the agencies more time to collect relevant data
from large banking organizations and develop additional
guidance, and to allow firms more time to put appropriate
internal mechanisms in place.
For example, the metrics to be reported by the largest
banking organizations will help firms and regulators
distinguish prohibited proprietary trading and high-risk
trading strategies from legitimate market making, while taking
account of the differences in particular markets and
instruments. More generally, one would expect that a good many
of the uncertainties will be reduced over time as both banking
entities and regulators gain experience with this new
regulatory framework.
Of course, to reach this point, the five agencies
represented here will need to coordinate their work. Because
the bulk of the activities encompassed by the statute take
place in U.S. broker-dealers and national banks, entities for
which the Federal Reserve is not the primary supervisor, we
will have a somewhat lesser role in the Volcker Rule
implementation process. But we still have an important role to
play. Shortly after adopting the Volcker Rule, the five
agencies agreed to create an interagency working group to help
ensure consistency in application of the final rule to banking
entities within their respective jurisdictions. That group has
already begun to meet.
Finally, I would note that the Volcker Rule alone cannot
assure the safety and soundness of trading operations. It is
critical that all our agencies take an approach in monitoring
constraining attendant risks in our largest financial
institutions that is consistent with these broader safety and
soundness aims. Capital regulation remains at the core of that
comprehensive approach.
Thank you for your attention, and I would be pleased to
answer any questions you may have.
[The prepared statement of Governor Tarullo can be found on
page 98 of the appendix.]
Chairman Hensarling. Chair White, you are now recognized.
STATEMENT OF THE HONORABLE MARY JO WHITE, CHAIR, U.S.
SECURITIES AND EXCHANGE COMMISSION
Ms. White. Thank you very much, Chairman Hensarling,
Ranking Member Waters, and members of the committee. Thank you
for inviting me to testify about the final rule implementing
Section 619 of the Dodd-Frank Act, commonly referred to as the
Volcker Rule, adopted under the Bank Holding Company Act on
December 10th by the Federal banking agencies, the SEC, and the
CFTC.
The final rule carries out the mandate of Congress. The
rule reflects an extensive effort by all five agencies to
design a regulatory framework that is consistent with the
language and purpose of the statute and that preserves diverse
and competitive markets.
Throughout the rulemaking process, Commission staff played
a critical, constructive, and collaborative role, bringing its
expertise to bear as a regulator of markets, market
intermediaries, asset managers, and investment funds. The
Commission, like the other agencies, received and reviewed
thousands of comment letters on the statutory mandate and the
proposed rules, and met with numerous market participants and
other interested parties.
The comments covered a wide spectrum of issues, including
concerns about potential negative market and other economic
impacts, as well as risks of evasion. The Commission, together
with the other agencies, carefully considered and responded to
these comments with a final rule that reduces the potential
impacts on markets while also addressing concerns about evasion
of the statutory requirements through a robust compliance
program.
It was very important, in my view, that all five agencies
adopt the same rule under the Bank Holding Company Act and to
apply and implement the rule consistently based on continuing
consultation and collaboration. In developing and issuing the
rule, Section 619 of the Dodd-Frank Act imposed on all of the
agencies obligations of coordination, consistency, and
comparability. Market participants, investor advocates, and
others also all called for a common rule that would be
consistently applied.
While the final rule in many respects is similar to the
proposed rule, there are a number of changes which relate to
areas of the Commission's expertise that I would just like to
very briefly highlight.
The first area is the statutory exemptions from the ban on
proprietary trading for market making and underwriting, which
are necessary activities for raising capital and the healthy
functioning of the U.S. markets. The final rule takes a
measured but robust approach, benefitting from a consideration
of commenter views on potential unintended market impacts,
particularly with respect to liquidity and off-exchange
markets.
Another area is the implementation of the statutory
provisions limiting the ability of banking entities to sponsor
or invest in hedge funds and private equity funds. Responding
to extensive comments, the final rule refines the definition of
a covered fund to exclude certain entities, such as operational
subsidiaries and joint ventures, which do not present the same
risks as the covered funds targeted by the statute.
A third area relates to the cross-border scope of the
proposed rule, which is and was the subject of a number of
comments focused on the potential competitive impacts and
effects on liquidity. The final rule provides that so long as
the trading decisions and principal risks associated with the
activities of the foreign banking entity are located outside
the United States, a foreign banking entity may trade with U.S.
entities, subject to certain conditions. The approach is
designed to limit the risk to the United States arising from
proprietary trading by foreign banking entities while creating
a reasonable competitive parity between domestic and foreign
banking entities and helping to ensure that U.S. investors can
continue to benefit from liquidity provided by foreign banking
entities.
As we move forward, we must be alert to both unintended
impacts and regulatory loopholes. We also appreciate that
market participants will have an ongoing need for guidance
regarding questions that will arise as they seek to comply with
the final rules. To address these questions and concerns, as
you have heard, the agencies have formed an interagency working
group that will meet regularly to coordinate the agencies'
interpretations and implementation of the rule on a going-
forward basis.
Thank you for providing me the opportunity to testify
today. I would be pleased to respond to questions.
[The prepared statement of Chair White can be found on page
110 of the appendix.]
Chairman Hensarling. Comptroller Curry, you are now
recognized for 5 minutes.
STATEMENT OF THE HONORABLE THOMAS J. CURRY, COMPTROLLER OF THE
CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Curry. Chairman Hensarling, Ranking Member Waters, and
members of the committee, thank you for the opportunity to
testify today on the Volcker Rule.
As you are aware, on December 10th, 2013, the OCC was one
of five agencies that adopted a final rule to implement the
requirements of Section 619 of the Dodd-Frank Act, known as the
Volcker Rule. Consistent with the statute, the rule prohibits
banking entities from engaging in proprietary trading and
strictly limits their ability to invest in hedge funds or
private equity funds.
However, the rule does permit banks to continue engaging in
important financial activities such as market making,
underwriting, risk-mitigating, hedging, and trading in
government obligations. The rule is designed to preserve market
liquidity and allow banks to continue to provide important
services for their clients while tailoring the compliance
requirements to the size of the bank and the complexity of its
activities.
In developing the final rule, we carefully considered more
than 18,000 comments. Commenters raised significant and complex
issues. They also provided thoughtful, although sometimes
conflicting recommendations. My written statement describes
several of the changes that the agencies made to the final rule
in response to these comments. For example, some of the changes
were designed to clarify how banks can continue to use hedging
activities to reduce specific risks. Other changes were made to
narrow the scope of funds covered under the rule.
While the statute applies to banks of all sizes, not all
banks perform the activities that present the risks the statute
sought to address. Throughout the rulemaking, the OCC worked to
minimize the burden the rule would place on community banks. I
am pleased that under the final rule, community banks which
trade only in certain government obligations have no compliance
requirements whatsoever. Moreover, community banks which engage
in low-risk activities will be subject to minimal requirements.
On an issue of particular importance to community banks and
members of this committee, we also recently clarified that
banks could continue to own collateralized debt obligations
backed by trust preferred securities in a way that is
consistent with the Collins Amendment to the Dodd-Frank Act.
By contrast to expectations for community banks, the rule
will require significant changes at large banks which engage in
trading in covered fund activities. Most large institutions
have been preparing for these changes since the statute became
effective in July 2012 and have been shutting down
impermissible proprietary trading operations. Now that the
final rule has been released, large banks will need to bring
their trading and covered fund activities into compliance
during the conformance period, which runs through July 21,
2015.
Large banks will be subject to enhanced compliance
requirements, which will include detailed policies, procedures,
and governance processes. The CEOs of every bank subject to
these enhanced compliance requirements must also provide annual
attestations about their compliance programs. In addition, the
largest trading bank will begin reporting on seven categories
of metrics this summer.
At the OCC, we are committed to maintaining a robust
program to assess and enforce banks' compliance with the
Volcker Rule. We are developing examination procedures and
training to help our examiners assess whether banks are taking
appropriate action to bring their trading activities and
investments into conformance with the rule.
I am mindful of the need to ensure that the agencies
provide consistency in the application of the rule itself. For
this reason, the OCC led the formation of an interagency
working group to respond to and collaborate on key supervisory
issues which arise under the rule. I am pleased to also report
that the interagency group held its first meeting in late
January and will continue to meet on a regular basis to discuss
application and enforcement of the rule.
Thank you again for the opportunity to appear before the
committee today, and I am more than happy to answer your
questions. Thank you.
[The prepared statement of Comptroller Curry can be found
on page 67 of the appendix.]
Chairman Hensarling. Chairman Gruenberg, you are now
recognized for 5 minutes.
STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, CHAIRMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Gruenberg. Chairman Hensarling, Ranking Member Waters,
and members of the committee, I appreciate the opportunity to
testify today on behalf of the FDIC on the regulations to
implement Section 619 of the Dodd-Frank Act, also known as the
Volcker Rule. Mr. Chairman, I realize this may be one of those
occasions where everything may have already been said, but not
everyone said it. So I will try to be brief.
The purpose of the Volcker Rule is to limit certain risky
activities of banking entities that are supported by the public
safety net, whether through deposit insurance or access to the
Federal Reserve's discount window. In general, the rule
prohibits banking entities from engaging in proprietary trading
activities and places limits on the ability of banking entities
to invest in or have certain relationships with hedge funds and
private equity funds.
After extensive interagency deliberations and careful
analysis of the 18,000 comments received in response to the
proposed regulation, the FDIC, along with the other agencies
represented here today, adopted the Volcker Rule last December.
The final rule is consistent with the proposed rule and
reflects changes made in response to the substantive comments
received during the rulemaking process.
The proprietary trading restrictions of the rule seek to
balance the prudential restrictions of the Volcker Rule while
preserving permissible underwriting, market-making, and risk-
mitigating hedging activities. The final rule also provides
other exemptions from the proprietary trading prohibition, such
as trading on behalf of a customer or in a fiduciary capacity.
Perhaps the most challenging and complex of these
exemptions has been the exemption for market-making activities.
Under the final rule, the market-making exemption has been
modified to reduce operational complexity and uncertainty for
banking entities and at the same time to increase management
accountability for ensuring that the requirements of the
exemption are met.
With respect to the risk-mitigating hedging exemption, the
requirements of the exemption are generally designed to ensure
that the banking entity's hedging activity is limited to risk
mitigating hedging in purpose and effect. For instance, hedging
activity must be designed to demonstrably reduce or
significantly mitigate specific identifiable risks of
individual or aggregated positions of the banking entity.
The final rule also prohibits banking entities from owning
and sponsoring hedge funds and private equity funds, referred
to in the final rule as covered funds. Commenters frequently
noted that including all commodity pools as covered funds, as
originally proposed, would be overly inclusive. The agencies
broadly accepted this suggestion from commenters, resulting in
a final rule that focuses the definition of covered funds on
those commodity pools which have characteristics that are more
closely aligned to those of a hedge fund or private equity
fund.
Also in response to concerns raised by commenters, the
final rule provides compliance requirements that vary based on
the size of the banking entity and the amount of covered
activities it conducts. For example, the final rule imposes no
compliance burden on banking entities that do not engage in
activities that are covered by the Volcker Rule.
We also recognize, as has been noted, that clear and
consistent application of the final rule across all banking
entities will be extremely important. To help ensure this
consistency, the five agencies have formed an interagency
Volcker Rule Implementation Working Group. The group has begun
meeting and will meet regularly to address reporting guidance
and interpretation issues to facilitate compliance with the
rule.
Mr. Chairman, that concludes my statement, and I will be
happy to respond to questions.
[The prepared statement of Chairman Gruenberg can be found
on page 80 of the appendix.]
Chairman Hensarling. Thank you.
And now, Chairman Wetjen, you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE MARK P. WETJEN, ACTING CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION
Mr. Wetjen. Thank you, and good morning, Chairman
Hensarling, Ranking Member Waters, and members of the
committee. I am pleased to join my fellow regulators in
testifying today.
As this committee is well aware, the Commodity Futures
Trading Commission was given significant rulemaking
responsibilities through passage of the Dodd-Frank Act. The
Commission has substantially met those responsibilities, with
only a few rulemakings remaining. As a result, nearly 100 swap
dealers have registered with the Commission. Counterparty
credit risk has been reduced through the Commission's clearing
mandate. And pre- and post-trade transparency in the swaps
market exists where it did not before.
In recent weeks, the Commission finalized the Volcker Rule,
which was one of our last major rules under Dodd-Frank. The
Commission's interest here, however, is relatively limited
regarding the scope of and number of entities subject to its
jurisdiction.
I will now address some of the specific topics of interest
that the committee identified before today's hearing.
A notable hallmark of the Volcker Rulemaking effort was
that the market regulators went beyond the congressional
requirement to simply coordinate. In fact, the Commission's
final rule includes the same substantive rule text adopted by
the other agencies.
Building a consensus among five different government
agencies was no easy task, and the level of coordination on
this complicated rulemaking was exceptional. More than 18,000
comments addressing numerous aspects of the proposal were
submitted to the rule-writing agencies. Commission staff hosted
a public roundtable on the proposed rule and met with a number
of commenters. Through weekly interagency meetings, along with
more informal discussions, Commission and other agency staff
carefully considered the comments in formulating the final
rule.
The agencies were responsive to the comments when
appropriate, which led to several changes from the proposed
Volcker Rule. I would like to highlight just a few.
The final Volcker Rule included some alterations to certain
parts of the hedging exemption requirements found in the
proposal. For instance, the final rule requires banking
entities to have controls in place to their compliance programs
to demonstrate that hedges would likely be correlated with an
underlying position. The final rule also requires ongoing
recalibration of hedging positions in order for the entities to
remain in compliance.
Additionally, the final rule provides the hedging related
to a trading desk's market-making activities is part of the
trading desk's financial exposure, which can be managed
separately from the risk-mitigating hedging exemption. Another
modification to the proposal was to include under covered funds
only those commodity pools that resemble, in terms of the type
of offering and investor base, a typical hedge fund.
With respect to the more recent interim final rule relating
to TruPS, the Commission last month quickly and unanimously
adopted it in an effort to assist community banks. This
response was another example of the Commission responding
promptly to compliance challenges presented to it and also
demonstrated the enduring commitment of all the agencies here
to ongoing coordination.
Compliance with the Volcker Rule, including the reporting
of key metrics, will provide the Commission important new
information that will buttress its oversight of swap dealers
and Futures Commission merchants, which are entities registered
with the Commission that are subject to the rule.
To ensure consistent, efficient implementation of the
Volcker Rule, the agencies have established an implementation
task force. One of the Commission's goals for this task force
will be to avoid unnecessary compliance and enforcement efforts
by the agency. Indeed, this goal is one of necessity for the
Commission. Our agency remains resource constrained and cannot
reasonably be expected to effectively police compliance to the
fullest extent.
To be effective, the Commission's oversight of these
registrants requires technological tools and staff with
expertise to analyze complex financial information. The
Commission needs additional funding to deploy a basic
nonduplicative oversight regime consistent with the rule. The
Commission also is analyzing whether it can leverage the use of
self-regulatory organizations, such as the National Futures
Association, to assist with its responsibilities under the
Volcker Rule.
Additionally, I have directed the staff to examine whether
new authorities are needed for the Commission to appropriately
enforce the Volcker Rule. Because the rule was authorized under
the Bank Holding Company Act, the Commission night need
additional rulemaking in order to best respond to violations by
swap dealers and FCMs. I will be glad to keep this committee
informed about the results of that analysis.
Regarding this committee's stated interest in the Volcker
Rule's impact on market liquidity, it is important to note that
the final rule closely follows the statutory mandate. In other
words, the rule strikes an appropriate balance in prohibiting
banking entities from engaging in the types of proprietary
trading that Congress contemplated while protecting liquidity
and risk management through legitimate market-making and
hedging activities.
Before and after the compliance dates for the Volcker Rule
take effect next year, the Commission will continue its
surveillance of the derivatives markets and monitor for any
liquidity impacts brought by this rule or other causes as the
swap market structure evolves.
Thank you for inviting me today, and I would be happy to
answer any questions.
[The prepared statement of Acting Chairman Wetjen can be
found on page 105 of the appendix.]
Chairman Hensarling. I thank each of our panelists.
The Chair now recognizes himself for 5 minutes.
I want to start out doing something that I rarely do at
these hearings, and that is to sympathize with the panel of
regulators. How one goes about trying to reconcile permissible
market making with impermissible proprietary trading quite
easily could be the topic of the next ``Mission Impossible''
movie. So, I get that. But you did volunteer for the job.
Looking at your testimony, Governor Tarullo, you said that
trades could be either permissible or impermissible depending
on the intent of the trade or the context and circumstances
within which the trades are made. While the final rule issued
by the agencies articulates standards for making those
distinctions, those standards will be given meaning as they are
applied by banking entities and supervisors in the field.
Assuming you don't take issue with yourself, do any of the
other panelists take issue with Governor Tarullo's statement?
If not, I guess here is my question, or perhaps it is more
of a comment. It seems to me that in many respects we still
don't have a final rule, because it really depends upon the
discretion of those in the field, particularly applying to
one's intent. And I just want to say for the benefit of our
committee, this isn't the rule of law, and this is one of the
reasons that we will continue to have a chilling effect, I
believe, on many corporate bond markets.
Now, I know under the statute--and, again, the statute
forces you to do many things that you may not otherwise feel
are logical--exemptions are granted from the Volcker Rule, the
Treasury Securities agency debt like Fannie and Freddie, and
municipal securities as well. So we know that regrettably
Detroit has gone belly up, and at least the last public
proposal that I have seen offers creditors pennies on the
dollar of their $11.5 million of unsecured debt. I woke up
today and saw the headline in The Wall Street Journal, ``Puerto
Rico Debt Cut to Junk Level.''
And so, would anybody on the panel argue that our banks are
safer and sounder or our financial system is more stable if our
banks trade and hold Puerto Rican and Detroit debt as opposed
to General Electric, Southwest Airlines, and Home Depot? And
although I haven't checked the latest ratings, the last I
looked, they were all AAA or AA. Does anyone wish to posit
safety and soundness or greater stability?
Seeing none, I would ask this question. Under Section 619
of Dodd-Frank, we list a number of financial products which are
exempt from the proprietary trading ban, but not included in
that list are explicit exemptions for certain sovereign debt
obligations. Now, you as a group have chosen to provide that. I
assume that is done under Section 13, where I read, as long as
it would ``promote and protect safety and soundness of the
banking entity and the financial stability of the United
States.''
So Santander Bank, which is a U.S. bank holding company, is
a wholly owned subsidiary of the Spanish Santander Group. They
are going to be eligible under your rule. This isn't what
Congress did.
And by the way, just because Congress makes a mistake, that
doesn't mean you have to make one.
But now the U.S. bank holding company is going to be able
to trade in Spanish debt currently rated Baa3 by Moody's, the
lowest rating before junk status. Also included in your
exemption is that the same bank can proprietarily trade in the
debt of every political subdivision of Spain, including
Valencia, which I believe is known more for its great paella
than its great bond offerings. They are currently rated B1,
which according to Moody's is junk status and ``should be
judged as being speculative and a high credit risk.''
So how can Santander Bank's ability to proprietarily trade
in Spanish debt and the debt of Valencia, Spain, ``promote and
protect the safety and soundness of Santander Bank and the
financial stability of the United States?''
Who would like to answer that? Governor Tarullo, would you
like to answer the question?
Mr. Tarullo. Just a couple of clarifying points. One, we do
need to bear in mind that the prohibitions in the Volcker Rule
with respect to trading, remember, are for short-term trading.
The Volcker Rule does not determine what kind of instruments a
depository institution or another affiliate within a bank
holding company can or cannot hold.
It was for that reason, by the way, I put in that point
about capital at the end of my prepared remarks, because our
rules, the rules, that is, of the FDIC, the OCC, and the Fed
will require capital set-asides for any assets held by the
financial institutions, and those capital set-asides, of
course, are determined with respect to the relevant riskiness.
Chairman Hensarling. Regrettably, I see my time is way
expired, but you are still showing a bias in favor of Spanish
debt over U.S. companies through your rule.
The Chair now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
Mr. Tarullo, on page 2 of your testimony, while still in
the first paragraph, you said, also, of course, the London
Whale episode allowed staff to test procedural and substantive
requirements of the proposed rule against a real world example
of what should not happen in banking organizations.
The JPMorgan London Whale trade is a textbook example of
how a hedge can actually be a proprietary trade. In the course
of just a few months, JPMorgan lost more than $6 billion
through complicated swaps transactions.
Is it correct that the Volcker Rule would prevent these so-
called hedges in the future? Would you explain how the Volcker
Rule attempts to prevent the next London Whale?
Mr. Tarullo. Congresswoman Waters, I think there are two
ways in which the rule would be responsive to what we saw
transpire in the London Whale episode.
The first is procedural; that is to say that one of the
things that has been reported about the London Whale episode is
that the risk management lines of authority and the relative
amount of risk assessment and documentation of risk that were
done were not in accord with what the Volcker Rule would
require.
Essentially, the Volcker Rule says if you have something
which is supposed to be a hedge, you have to document that it
is a hedge, and that documentation not only provides the
regulators with the opportunity to oversee the implementation
of the rule, it allows the risk management officials of the
financial institution itself to have a better handle on the
various trades that are taking place throughout the
organization.
So in that respect, I think there is a substantial
confluence of interest of the regulators and the ultimately
responsible risk managers of a firm.
The second is the substance of the situation, where
anything can be characterized as a hedge if you work hard
enough at it. And what the rule is intended to do, and I think
with the kinds of changes that some of my colleagues describe
does a better job of doing than maybe the proposed rule did, is
to make sure that trades that are supposed to be hedges on
existing positions do not take on more risk that previously
didn't exist. And that, in fact, of course is what happened
with many of the trades involved in the London Whale.
So the short answer is, on both procedural and substantive
grounds, it would be responsive to that episode.
Ms. Waters. Thank you very much.
Mr. Gruenberg, compliance with the Volcker Rule will
largely be judged by a bank's compliance with their own
internal policies and procedures, which they will be permitted
to devise. Yet we know from past experience that banks have
sometimes not complied with their own internal policies. Just
look at examples of money laundering, and robo signing of
foreclosure documents.
How can Congress ensure that the rule is being faithfully
implemented by your agencies and banks, and that banks are
being held to compliance with their own policies and
procedures?
Mr. Gruenberg. Congresswoman, I think compliance and
enforcement of compliance in many ways is the central issue
relating to implementation of the Volcker Rule. The Volcker
Rule establishes some prohibitions, but the real key to it is
going to be oversight, supervision, and enforcement of the
compliance requirements.
And as we know, the activities prohibited by Volcker are
largely concentrated in the largest financial institutions,
which is why the compliance requirements of the rule are very
much focused on the larger institutions. And for those larger
institutions, they will have detailed reporting and
recordkeeping and a set of other requirements, including
metrics reporting for their activities, so we will be able to
monitor the operations of the companies across-the-board.
But all of that is ultimately going to depend on vigorous
oversight and supervision by the agencies as well. And I think
that is why we have made a point of establishing this working
group, and I think--and you can ask each of the people at the
table here--the commitment to effective enforcement is really
going to be the key to implementation here.
Ms. Waters. Mr. Curry, once the Volcker Rule has been
implemented and operational for 7 years, what demonstrable
factors should Congress be able to look at in order to see that
the rule is working as intended?
Mr. Curry. I think we will find from our oversight and
regular examination and supervision of the institutions whether
in fact they have complied in terms of the compliance
procedures they are monitoring and the effectiveness of their
metrics that are required under the rule itself. We will also
be taking advantage of the conformance period to test both the
institution's procedures and our own internal examination
procedures as we proceed with the rule.
Ms. Waters. Thank you. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Chairman Garrett, for 5 minutes.
Mr. Garrett. Sure. Thanks, Mr. Chairman.
Chairman Gruenberg, good morning.
So following up along the lines of the chairman here, as he
has indicated, the Volcker preamble states that regulators have
the ability to use safety and soundness authority to exempt
certain foreign and sovereign debt. As he pointed out, there is
certain debt, such as Greece and Spain, that is extremely
risky, and about which we should be highly concerned. And one
can make the case that by doing so, you are actually making
some of these institutions less safe and less sound by allowing
them to do this.
On the other hand, when it comes to addressing the problems
in the CLO market, the preamble also states that you could have
used your safety and soundness authority to address the
concerns that have been raised here, and if you don't, then
banks will be forced to fire-sale some of their legacy CLO
holdings. This could drive down the prices, it could hurt the
markets, and it could hurt those banks and make them less safe
and sound than they are right now.
And this is not a hypothetical that I am saying here. I
have with me a letter from the First Federal Savings Bank of
Elizabethtown, Kentucky. They are a small bank, $850 million in
assets, so they are not the real target of the Volcker Rule.
The letter states that they are still recovering from the
financial crisis, they have new management, and they finally
got some income, around $3 million.
However, the letter goes on to say, and this is important:
``The application of the final rules could result in the severe
erosion of our already thin tangible common equity that was so
severely depleted during the credit crisis. It is hard to
understand, as a management team that was able to take a
financial institution through the darkest days of the financial
crisis, why we should be presented with another existential
threat based solely on an arbitrary and expansive
interpretation of the final rule.''
So why are you using the safety and soundness argument on
the one hand to allow for Greek and Spanish debt, but in a case
like here, a good little bank that is trying to come out from
under water, you are now imposing an existential threat on them
and potentially putting them out of business? And this was, of
course, not the intention of Congress.
Mr. Gruenberg. Congressman, I did receive the letter. We
received the letter, I think all of the agencies did, from the
institution.
Mr. Garrett. Sure.
Mr. Gruenberg. So I am familiar with it, but since it
obviously affects an individual company, I won't respond to
that specifically.
Mr. Garrett. Sure.
Mr. Gruenberg. But if I may just speak more generally, the
issue of CLOs, collateralized loan obligations, has been
raised, particularly since the final rule was issued. It is
certainly an issue, fair to say, it is fair to say, that the
agencies now will have the opportunity to review and consider.
I guess I would just make a couple of points, if I may.
Mr. Garrett. So if you can get back to me on how and when
you think you can actually fix this, because obviously for
these small banks right now, they can't wait the normal course
of time which it took this body to come up with this rule. I
don't know for this particular bank, but other banks in a
couple of years could, while your working group works your way
through it, be out of business and the people in that town
could have one less bank.
A working group has been established. I guess I would put
this question to everyone on the panel. One of the things that
I was looking for, which was not done, was a cost-benefit
analysis, correct? And that is despite the fact it was pointed
out to us that there was a law in place, the Riegle Community
Development and Regulatory Improvement Act back in 1994, that
requires Federal agencies including the Fed and the FDIC, when
they are coming up with a new rule, to basically--and I won't
read the whole thing here; I don't have that much time--assess
the cost on institutions and also the benefits.
So since that is the law in place, why was it that no one
did a cost-benefit analysis?
Mr. Tarullo. I wouldn't say, Congressman, that there was no
cost-benefit analysis. I think what you actually saw--
Mr. Garrett. I have not seen anyone who has said that there
is. You say there is a cost-benefit analysis? Can you provide
it to the committee?
Mr. Tarullo. First off, we should start by remembering that
the basic policy decision was made by the Congress. That is,
the Congress decided that proprietary trading--
Mr. Garrett. Now, look. I only have 46 seconds. A cost-
benefit analysis was not done, and it was a requirement. I
would like an explanation in writing from each one of you on
the panel as to why you did not comply with that.
Also, I would like a commitment, since you have a working
group here and you have indicated that you will be going
forward, maybe I will just run down the row in the last 20
seconds, will each of you commit, going forward through the
working group, to develop an agreed-upon set of basis or
metrics to determine the rule's impact on the ability of
businesses to borrow in the corporate bond market, and also
through this working group to continuously monitor those
metrics and the impact of those rules, and then to also report
back to us on a quarterly basis on your findings? That way, we
would actually have specifics and timeframes.
Let's run down. I will start on the left.
Governor Tarullo?
Mr. Tarullo. Congressman, I am not sure that sitting here--
I want to consult with our colleagues to see what kind of
process we are going to follow. We are surely going to follow a
process of trying to deal with interpretive difficulties. I do
beg to differ a bit. I think--
Chairman Hensarling. We need rapid answers. The time of the
gentleman has expired. Rapid answers, please.
Ms. White. I will say that I think that the working group
is enormously important to look for and analyze unintended
consequences and respond to them, which is the purpose of it.
It is very actively engaged now, including considering what you
mentioned--
Mr. Garrett. Can you all commit to the timeframe and
everything else that I laid out there, Mr. Chairman, from them?
Maybe you can just ask them to run down, yes or no, make the
commitment.
Mr. Curry. We will also be looking at the, during the
performance period, the impact of the metrics and other
procedures that we are developing.
Chairman Hensarling. Quickly, the last two gentlemen.
Mr. Gruenberg. Yes. We will do the same as Comptroller
Curry indicated.
Mr. Wetjen. As will the CFTC.
Mr. Tarullo. Mr. Chairman, could I just take 10 seconds for
Congressman Garrett to say, whatever it is, whatever processes
we do decide, we surely will report them back to you and try to
give you a sense of how this oversight and implementation is
taking place, which will then in turn allow you to ask more
questions about it.
Chairman Hensarling. The time of the gentleman has expired.
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 thank the chairman for yielding.
The idea behind the Volcker Rule is a simple one: Banks
that receive Federal deposit insurance should be serving their
customers and not making risky bets for their own account. It
took nearly 4 years for this simple idea to be translated into
a final rule, and the majority of the work was done by the five
regulators before us today, and I would simply like to say
thank you.
I would also like to point out that most of the banks
across this country have already accepted the Volcker Rule. I
did a survey of the banks that I am privileged to represent,
and every single one of them is treating it like the law of the
land. Every single one has spun off their proprietary trading
desks.
So the Volcker Rule, I would say, is here to stay. Instead
of rehashing the same old debates, I believe we should be
focused on getting the implementation right and making sure
that the rule is tough but workable.
So with that in mind, I would like to ask Governor Tarullo,
I understand that the CLO industry has proposed a fix that some
in the regulatory community may consider too broad, and I agree
that we should be very careful about amending the Volcker Rule,
because we don't want to blow up a huge hole in the rule. But I
would like to ask you, do you think that there is some narrower
fix that would solve their challenge, their problem, while also
protecting the Volcker Rule?
Mr. Tarullo. Congresswoman Maloney, that, I think, is the
question that we will have to address. And in fact, I think
someone already alluded to the fact that this issue was already
at the top of the list of the group to think about. You have
quite properly identified the challenge, which is to see
whether there is a way to respond where, legitimately, the
interests implicated by the Volcker Rule are not at issue
without opening up a broader hole that does implicate those
issues.
I would just note in passing that an approach to this
already appears to be in train among some market actors, which
is to say, making sure that the CLOs, new CLOs which they are
issuing do not contain other securities that cause the position
to become a covered fund. Now, that doesn't deal with the
legacy issue, and that is the one we will be addressing. But
going forward, at least, there is a way which I think the
industry itself has already identified.
Mrs. Maloney. And how, Governor--or anyone else on the
panel--are the agencies planning to share the trading data that
they are going to collect to monitor compliance with the
Volcker Rule? Will there be a centralized location for the
trading data, such as the Office of Financial Research, or will
each regulator examine the data that it collects separately?
Ms. White. Maybe I could respond to that initially. Again,
the working group for implementation has already begun to
discuss that, and the feasibility of having a common site for
the data, but the discussions are ongoing as we speak.
Mrs. Maloney. Okay. You mentioned in your testimony earlier
that the working group is clarifying different parts of the
Volcker Rule now. But do you know yet how they are going to
coordinate enforcement of the Volcker Rule? What if one agency
thinks that a trade violates the Volcker Rule, but another
agency thinks that it is acceptable? How are you going to solve
that? Are you working on a memorandum of understanding on
enforcement? But what happens if two regulators disagree on an
action?
Ms. White. Again, I think the consistency and enforcement
is also very much under discussion by all the agencies,
including in this working group. Each of the agencies would
have the power to require divestiture or a bank to stop
engaging in proprietary trading. Issues could be discovered
upon exam by any of the agencies and discussed and coordinated
among the agencies before a decision is made as to what to do
enforcement-wise.
Mrs. Maloney. What happens when there is a legitimate
disagreement between them?
Ms. White. The goal is obviously consistency, but there is
a mechanism to discuss that, toward that objective.
Mr. Tarullo. I would just add, Congresswoman, that in the
bank regulatory area, the issue of an activity that affects
different parts of a bank holding company arises quite
frequently, and in fact the three banking agencies have a very
well-established set of mechanisms for consulting. And I have
to say it has struck me in my 5 years at the Fed that rarely
does disagreement on that among staff come to my level. They
are usually able to work it out. And I don't see any reason why
that wouldn't be the case with the Volcker Rule as well.
Mrs. Maloney. Thank you. My time has expired.
Chairman Hensarling. The Chair now recognizes the
gentlelady from West Virginia, Mrs. Capito, the Chair of our
Financial Institutions Subcommittee, for 5 minutes.
Mrs. Capito. Thank you, Mr. Chairman.
I want to go to the issue that I talked about in my opening
statement, which was the issue of the CDOs and the TruPS and
how that ended up in the final rule, when the proposed rule did
not really go into this area, and therefore, there was no
comment period to see this unintended consequence.
So if somebody could give me some clarity, why did you
choose to put this into the final rule without allowing those
most deeply affected, most particularly community banks, to
have the opportunity to bring to light to you all and to others
that this was going to have some negative impacts? Who wants to
answer that?
Mr. Tarullo. I can start, Congresswoman Capito.
As I think you know, the issue with the TruPS arose from a
confluence of several factors. One, of course, was the rule
itself, and I think people understood that there was
contemplation of divestiture, and that is why there was a
conformance period created just exactly to avoid fire sales.
The second, and here is where I think a lot of people
probably didn't focus on it both outside and inside the
regulatory agencies, was the combination of the fact that
accounting rules require that where the instruments in question
had lost value in the market, that there was essentially a
bringing forward of the mark-to-market adjustment because of
the fact that those instruments were declining in value. And
that is, I think, the interaction that wasn't contemplated, and
that was why in particular we all felt that a quick response
was required.
I think with a lot of the other instruments that people
have talked about, as I indicated to Congresswoman Maloney, we
will be going through those, but in many, if not most
instances, a lot of the instruments in question are actually at
or above the values where they were issued into the market, and
so the accounting rules are not forcing the decision and the
write-downs immediately.
Mrs. Capito. Okay. Let me ask a question, then, of Chair
White. Your agency oversees the Financial Accounting Standards
Board (FASB). Is this something that came into your bailiwick
as we were creating this new part of the rule moving into
December, as we have heard?
Ms. White. I think I would have two responses to that. One,
I think in the proposing release, at least broadly, questions
were asked around covered funds, what is included and whatnot,
and there weren't specific comments that came back in on that
issue. I think one of the things that we were focusing on when
the issue did gel is to make certain that everyone understood
what the accounting rules were for a subsequent event should
the agencies then act as they ultimately did act. So, that is
an issue. It is not new accounting, but it is something that we
responded to as soon as it was obviously an issue.
Mrs. Capito. Right. I think the troubling thing from my
aspect is--and I mentioned this also--that the options, because
of the tight timeframes, were really a lawsuit that I think the
ABA put forth to try to stop this. And also, many of us,
Republicans and Democrats, were being approached quickly during
the Christmas season on how we are going to address this issue.
And so while I say thank you for making those adjustments in
January, it certainly would have been easier probably for
everybody if it was avoided on the front end.
The last comment I will make, and this goes to what Mrs.
Maloney was talking about, is that I am sitting here listening
and I must have heard at least 40 times ``interagency group.''
We have all been on committees before, and when you get into an
interagency group or you get into a committee, we all look at
each other and say, okay, who is going to decide here? Who is
in charge? I have yet to hear really who is in charge.
I know you work across agencies and everything, but I can
see a scenario that could be a negative scenario such as, who
is in charge? Nobody is in charge, so nobody makes a decision.
Or you make a decision over one another and then all of a
sudden there are three or four different decisions that have
been made, and how are the institutions supposed to react in
the best interests of their clients?
So if anybody has a comment on that, I know it is a work in
progress, but I am deeply concerned about that.
Mr. Tarullo. There is a legitimate concern, as you all well
know, whenever you have multiple actors having to agree on a
single course of action. I think that, as I was alluding to
earlier, this is actually the normal state of affairs for the
three banking agencies, and the need to coordinate, which
sometimes is in the face of some disagreements that then
sometimes do hold things up and they have to go up for decision
in that case.
I would just say it is the other side of wanting multiple
voices involved in any regulatory effort, which was clearly
Congress' intent with respect to the Volcker Rule.
Mrs. Capito. Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Gruenberg, I would like to talk to you about the
TruPS CDOs. As you heard, the final rule provided the financial
industry with many exemptions, including new guidance on TruPS
CDOs, which have community bankers very concerned. However,
some in the industry are now asking for more lenient treatment
regarding CLOs.
Can you explain what risk nonexempt or arbitrage CLOs pose?
And I would just like to ask you if it is wise at this point to
make another exemption, given the fact that only 100 community
banks out of 6,000 have CLOs?
Mr. Gruenberg. As has been indicated, that is the issue we
are going to have to consider. I think the things to think
about are, one, in regard to the CLOs, if a CLO is made up
exclusively of loans, and that would apply to a substantial
number of them, they would not be considered a covered fund and
therefore would not be subject to the Volcker Rule requirement.
For the others, that is really what we need to sort
through, and the industry refers to those as arbitrage CLOs,
and they have, in addition to loans, other kinds of
impermissible assets in the CLO. In many cases there are just a
small number of assets, so they can be easily disposed of and,
in a sense, the CLO can be cured from the standpoint of Volcker
compliance. In other cases, the other assets may be a
substantial portion of the CLO and create a greater challenge.
I think what the agency has to consider is what, if any,
change in treatment should be provided for them, and that is, I
think, what we will need to focus on.
Ms. Velazquez. So how would regulators have treated the
underlying loans in arbitrage CLOs if banks had originated them
and held them on their books?
Mr. Gruenberg. You are talking about loans that are by
definition leveraged loans that carry risk with them, if that
is the underlying questions that you are raising.
Ms. Velazquez. Mr. Chairman, again, industry participants
have stated a fire sale of CLOs could cost them 90 cents on the
dollar. I just would like to ask you if you know how they came
up with this figure?
Mr. Gruenberg. I couldn't say offhand where that came from.
Ms. Velazquez. What did regulators do in the rule to
prevent such a fire sale?
Mr. Gruenberg. I think that is part of sorting through the
issue, Congresswoman, both to examine the merits of the issue
and any potential consequences of a response.
Ms. Velazquez. Chair White, foreign markets have yet to
implement regulations similar to the Volcker Rule. What is the
likelihood that large U.S. banks will simply move their
proprietary trading overseas?
Ms. White. Obviously, the competitive effects of the
Volcker Rule as enacted in the statute are not new to us. It is
certainly one that we also attended to with respect to the rule
itself. I would note that in Europe, the United Kingdom,
France, and Germany, they are moving toward doing some kind of
rules in this space, but they have yet to sort of land on and
actually adopt those. So there is more to be said about that.
Obviously, what you don't want is the regulatory arbitrage, you
don't want the anticompetitive effects on the U.S. entities,
but the statute also requires what it requires.
Ms. Velazquez. So is there anything in the Volcker Rule
that addresses the threat to the U.S. financial system by
overseas proprietary trading?
Ms. White. I think that was one of the changes I actually
alluded to in my oral testimony with respect to proprietary
trading of foreign banking entities, whether it was going to be
anything solely out of the United States and was going to be
completely out from under the Volcker Rule. We might have lost
liquidity then, there might have been anticompetitive effects
that occurred then, and so we refined the rule in light of
those concerns.
Ms. Velazquez. Thank you.
Comptroller Curry, a recent OCC survey of financial
executives indicates a greater willingness to lend to
businesses and consumers. Is it possible that the Volcker Rule
could further boost small business lending as banks seek out
revenue in traditional financial products due to the general
prohibition on risky and lucrative proprietary trading?
Mr. Curry. We see that as a very positive sign that banks
are increasing their willingness to lend, and hopefully that
will translate into some economic benefit as well.
Ms. Velazquez. Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, the Chair of our Housing and Insurance
Subcommittee, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
I think this has been alluded to, 18,000 comments to a rule
that was originally put out that a lot of people felt like was
pretty vague when it was put out, and I think that is one of
the reasons you received 18,000 comments on it. But we were, I
think, many of us a little surprised it wasn't reproposed after
the fact that there was so much interest in that. There was
really not any chance then to review the changes, and there was
no economic analysis involved and really no provisions to
coordinate enforcement, examinations, and interpretations. I
would think, and hopefully the panel agrees, that is probably
not an ideal situation.
But that being said, what procedures have been established
to ensure that all of the impacted entities receive consistent
and timely answers to interpretive questions that I am sure, as
I am told, there are a lot of those coming in. I will just
start with the panel, and who would like to tell us what you
are doing?
Mr. Curry. I would just emphasize what other panelists have
said earlier, Congressman, that this is really going to be one
of the major frameworks that we have to establish for our
working group. I think the goal is to make sure that we have
consistent interpretation. The working group, which will be
composed of subject matter experts, will be the starting point
for those discussions and ultimately the principals of the
agency will make that call.
Mr. Neugebauer. Ms. White?
Ms. White. I really don't have much to add, so I don't want
to take your time on that. I think we were all focused on, it
is actually reflected in the adopting release, too, the
importance of consistency as we proceed further, and
responsiveness, and that we need to be very actively engaged,
as that is the purpose of the working group. It is also the
purpose of the commitment of all five agencies to do that.
Mr. Neugebauer. Obviously, these interpretations are going
to be a very important piece of the regulation, and so the
question is, one, you are saying that this working group is
going to coordinate that between the five of you. But the other
question is, how will we disseminate it? Will that be a public
process? In other words, once that finding is determined, and
that interpretation is done, will those interpretations be made
available for comment?
Mr. Tarullo. That probably depends. My suspicion is,
Congressman, without knowing now, that there will be some
issues that arise that are susceptible to more or less
generally applicable guidance, and that in that instance the
same kind of processes that we follow in other supervisory
areas, where you elaborate what you have been able to conclude
and you send it out to supervisors and examiners and it is
available to the firms, that would be the appropriate path to
follow.
There will probably be other instances, and I think in
particular in terms of market-making decisions on whether for a
particular kind of instrument the particular approach that a
firm is taking is in fact legitimate market-making, where it
might actually involve some proprietary information from the
firm. It will be a very sort of firm-specific interpretation
that, for example, the SEC may say to the rest of the group,
this is what we are facing, this is where we are inclined, does
everybody agree? And there may be a general agreement on that.
But then you wouldn't want to publish that, because you don't
want to publish the business strategy of a particular firm.
So I think it probably varies depending on the general
applicability and sort of nonfirm-information-revealing quality
of the decisions.
Mr. Neugebauer. And if that decision is challenged, for
example, then does that challenge go back to the working group
or does it go back to the individual entity? Then, how is that
reconciled?
Mr. Tarullo. Again, I am drawing here on our bank
supervisory experience where--and I would expect you will have
something similar to this in the Volcker Rule area--in the
first instance there tends to be a dialogue with the immediate
supervisors, and all of these big institutions that have to
report the metrics have onsite teams of supervisors from some
combination of the Fed, the FDIC, and the OCC. And then, of
course, the SEC has a regular relationship with the big broker-
dealers.
So that will be in the first instance. But as always
happens when there is a disagreement or an objection or a
desire to have the issue taken up in Washington at the
particular agency, then that happens. And as I say, the norm is
that these sort of things are actually worked out pretty
effectively. It is one of the advantages of the supervisory
process. There are exceptions, and that is when things get
bumped up the line.
Mr. Neugebauer. One quick question: If there is a
difference of opinion in the working group, is there somebody,
an individual agency who has the final word if the working
group doesn't find a--
Mr. Curry. It would be kicked up to the principals. We
would be deciding any issue that the agencies couldn't resolve
at the working group level.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks, for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman.
Let me start with the Governor.
Governor, I just want to follow up, I guess, on questions I
heard Mrs. Capito ask, because everyone wants to know what the
rules are and to have some certainty. But with the various
regulating bodies, there could be some conflicting
interpretations, making it confusing for many banks to
determine which agency has the final say on what.
Now that the rules have been adopted, would it make any
sense for one regulator to take the lead in the interpretive
guidance or at a minimum to have a process that ensures
identical guidance is issued from all regulators?
Mr. Tarullo. Congressman, I don't want to speak for the
four colleagues to my left--but I think probably everybody
would say that we all have a statutory mandate from the
Congress for the oversight of the particular entities that we
have, and under those circumstances you wouldn't formally cede
an interpretive authority, because ultimately we, for example,
would be responsible for the Volcker Rule at the State member
banks, Mary Jo at the broker-dealers, and Tom at the national
banks.
But again, having said that, I think part of the reason why
people are asking questions about how this works is precisely
because it generally works so well--again, at least among the
banking agencies, but we have more and more contacts with the
market regulators--of working things through.
And, just to remind everybody of something that was in
Chair White's opening remarks, that the decision of the market
regulators and of the banking regulators was not to go with our
own rules, even though, as you know, the Volcker Rule is really
a number of separate rules--the banking agencies, the broker-
dealers, the commodities dealers. But instead, everybody
understood the importance of getting consistency in the
regulation, notwithstanding the substantial additional time it
took to get there. And I would say that commitment to getting a
consistent regulatory framework will naturally extend to a
commitment to getting a consistent interpretive framework.
Mr. Meeks. Let me stay with you, Governor, because it has
also been argued that prohibiting proprietary trading will hurt
our banks as they compete overseas. The European Commission
recently recommended a version of the Volcker Rule for its
largest banks and the U.K. government has adopted a similar
proposal that pushes risky trades into a separately capitalized
ring-fenced entity. And my question to you is, how relevant are
competitiveness concerns in the current environment?
Mr. Tarullo. The tendencies you described have been very
interesting to me. When the Volcker Rule was first passed by
the Congress as part of Dodd-Frank back in 2010, I would say
the immediate reaction that I got in talking to counterparts in
other major financial jurisdictions was something along the
lines of, it will be interesting to watch how you all do this;
we are not likely to do anything. And yet in the intervening
years, as you have just mentioned, more and more of the key
jurisdictions have actually started to walk down that path to
thinking about some combination of ring fencing, banning of
proprietary trading.
And I think that is based on experience, Congressman. I
think people have had experiences with their own firms, I do
think that the London Whale episode resonated around the world
and not just within the United States. So although we don't
know, as Chair White said, where this is going to end up, it is
pretty notable that the trend in proposals has been to come
closer to something that looks more like the Volcker Rule. And
I will be honest with the committee, I would not have predicted
that 3 years ago.
Mr. Meeks. Thank you.
Chair White, let me ask you this question. I understand
that some industry stakeholders have expressed concerns
regarding whether banks would have to divest of certain senior
debt securities of CLOs because those securities contain the
right to remove a manager for cause. Currently, the Volcker
Rule only permits debt security holders to have the right to
remove the manager in the event of a default or an acceleration
event. Are your agencies considering whether these voting
rights with regard to the CLO manager constitute an equity
interest versus a creditor-protective right?
Ms. White. That is precisely one of the issues that, again,
the working group is discussing in connection with CLOs. The
issue is obviously what is an ownership interest, and it is
defined by the rule with certain factors, including the one you
note. So that is an issue that has been teed up for the group
and they are actively discussing it.
Mr. Meeks. I can't do another question in 4 seconds.
Chairman Hensarling. No, the gentleman can't.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I would like to address my first question to Mr. Gruenberg.
One of the concerns that I have is during the crisis there was
this activity that went on which put a lot of the investment
banks into the big banks and allowed Lehman Brothers, for
instance, to fail. But when you put the Bear Stearns of the
world in some of these other banks, I think you made them
bigger, I think you made the institution more risky, in my
judgment anyway.
And one of the concerns I have is when you do this,
suddenly now you put this more risky activity into an
institution that is insured by you and your agency, and you put
those deposits, I believe, more at risk. So over the last 5
years, I think some of them now are starting to spin off their
proprietary activity, their trading activity, their investment
banking activity. And I just wanted you to comment on that and
how much of it has gone on, how much does it still need to do,
and just your perspective.
Mr. Gruenberg. I think that is an important question,
Congressman. I think it is fair to say that the way we dealt
during the crisis with some of the troubled institutions was to
facilitate acquisitions by other institutions and consolidate
them into bank holding companies. And I think the combination
of those activities and the increased scale of the activities
raised significant questions for regulation and supervision.
I think it is one of the reasons we are so focused on the
capital and liquidity rules that particularly apply to these
large systemic companies, because of the risks they pose and
the need to, frankly, impose higher prudential requirements on
those large complex institutions that pose the greatest risk to
the system and are, I think, differentiable from a lot of the
other institutions in the system. So I think it is one of the
significant challenges for prudential standards and for
supervision going forward.
Mr. Luetkemeyer. One of the concerns I have, obviously, is
if it is an FDIC-insured institution, obviously that impacts
the FDI insurance fund, so there is some risk there for that.
But I am curious, how many banks that you are aware of just
off the top of your head, rough figure, have divested
themselves of these types of activities or put them into a
subsidiary of some kind so they now no longer have the main
institution, the retail portion of their business, that would
be impacted by this activity?
Mr. Gruenberg. I don't have those numbers available. I will
be glad to check on that and get back to you.
Mr. Luetkemeyer. Okay. Are there a lot of them that still
have those activities in the bank, then?
Mr. Gruenberg. I think most, but I want to check on the
facts here. For those that have separate proprietary trading
desks, I think as a result of the Volcker Rule, a lot of those
have been taken out.
Mr. Luetkemeyer. Right.
Mr. Gruenberg. But I would want to really check on the
facts for that.
Mr. Luetkemeyer. I am not a big fan of the rule, but that
seems to be one of the positives there, that they are starting
to segregate themselves and set up these separate entities,
which in my mind certainly protects the depository institutions
a little bit better.
Mr. Wetjen, you have been able to escape most of the
questions here today, so I want to grab one for you. One of the
things that happens, in my world anyway, is that a lot of folks
I deal with begin the commodity process with their contract,
when they take it out, is the first one and then it gets traded
a dozen times after that. Have you seen with the Volcker Rule a
chilling effect on folks being able to take out initial
contracts for commodities?
Mr. Wetjen. Congressman, I have not.
Mr. Luetkemeyer. Have you seen a cost increase to those
individuals or companies that take out the initial contracts to
hedge their commodity, whatever it is, whether it is corn and
beans or energy or whatever?
Mr. Wetjen. I have not been aware of any such change as a
result of the Volcker Rule. As I had mentioned in my oral
statement, there have been a variety of reforms that our agency
has put into place, and so consequently the market structure,
in particularly for swaps, has changed, so there has been some
attendant cost to the market structure changes in the swaps
markets as a result of our reforms. I don't have any specific
data on what the numbers would be, but I am not aware of
anything specific in relation to Volcker.
Mr. Luetkemeyer. The other members of the panel this
morning, very quickly, I have less than 30 seconds left here,
have you seen an increase in the cost of doing business as a
result of the Volcker Rule at this point yet?
Mr. Tarullo. No, sir.
Mr. Luetkemeyer. No?
Mr. Tarullo. No. But just to be fair, I think a lot of
people are waiting for the final rule to come out before they
start making--
Mr. Luetkemeyer. The anticipation of the final rule here
hasn't caused--
Mr. Tarullo. There it is basically, what you mentioned, the
prop trading has been divested.
Mr. Luetkemeyer. Okay.
Ms. White?
Ms. White. I haven't seen the increase in cost, but clearly
there are costs.
Mr. Luetkemeyer. Okay.
Mr. Curry?
Mr. Curry. I would agree. And that is something we will be
looking at during the conformance period.
Mr. Luetkemeyer. Okay.
Mr. Gruenberg? Okay. Thank you very much.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. And thank you for
having two members of the panel whose accents that I can
understand. Actually, they don't have accents; all the rest of
you have accents.
Gentlemen, first of all, thank you for being here, and
thank for your testimony. It is always amazing to me that in
today's world, from what I see, is the most complex financial
services industry in the history of mankind, not just in
America, but across the world. We are in a globalized economy,
we are all struggling to figure out what is going on, what is
going to happen tomorrow. And I checked out all of your
backgrounds. You are the smartest people in the world, you have
the best education you can have, and I know you are struggling
with it as well.
Yet this morning, on the basis of one rule that we
instituted with the intent of trying to limit some of the most
risky, most complicated activity the financial services people
were playing with, that many people think played a significant
role in the collapse of 2008, we passed a law that said, please
help us, not kill it, but to limit it, put it in perspective,
yet this morning from what I have heard so far, and we are not
even halfway through the hearing, the rule could be the cause
of the next economic collapse, it is arbitrary, it is
expansive, it is an existential threat to the economy, and
worst of all, apparently you all pass rules and regulations and
then don't give a damn what the impact will be.
I think that each of you should be prepared, not from me,
but at some point during this hearing, someone may as well just
ask you, why do you hate America?
I find this to be ridiculous. It is a complicated rule, of
which, as we move forward, I have had some communications with
some of you, I am currently in discussions with some of my
constituents who have some issues with some of the details,
community banks being one of them. My hope and expectation is
that you will work with us as best you can to address these
issues as they go forward, as we find them to be real.
I hope that each of you see that your role as a regulator
is not just to regulate. I hope and presume that you see as
part of your role a responsibility to inform us when you think
we are wrong or when you think we have made a mistake.
So I would like to ask each of you, if you could, if I made
you emperor of the world, would you repeal Section 618, 619,
yes or no? Simple item.
Mr. Tarullo, would you repeal it?
Mr. Tarullo. No, sir. And I think, as many people have
observed, the London Whale showed why.
Mr. Capuano. Ms. White?
Ms. White. I would not. And I would just like to add that I
think all of the regulators very carefully focused in the
rulemaking on the market impacts, economic impacts, and
responded to them and will continue to do so.
Mr. Capuano. I have always believed that. Even when there
were regulators that I didn't agree with, I have always thought
that regulators, like most Members of Congress, are good people
trying to make the world a better place.
Mr. Curry, would you repeal it?
Mr. Curry. I would agree with Governor Tarullo for the same
reasons. JPMorgan is a national bank. We supervise it. That was
an eye opener.
Mr. Capuano. Mr. Gruenberg, would you repeal it?
Mr. Gruenberg. No.
Mr. Capuano. Mr. Wetjen, would you repeal it?
Mr. Wetjen. No, I would not.
Mr. Capuano. As we go forward, I would like to ask a few
questions. First of all, I do think that there is a problem
having so many regulatory bodies participating in one rule.
That is why I have always been in favor of trying to
consolidate. Not that I don't like each of you individually,
but I do think that it is ridiculous that we have so many
regulators doing the same thing. Consolidation, to me, we have
had this debate a long time, I hope we actually make some
progress at some point, and each of you will be winners, don't
worry, we will figure out how. I don't know how.
That is a different issue. I hope that as you go forward, I
would strongly--I think it is part of your responsibility, I
shouldn't even have to ask, but I am going to do it for the
record--as you find things that you think that we should amend,
let us know, because I agree, I don't want it repealed. I am
more than open to amending it if you think that somehow we
missed a comma or we have to tweak it or you think that you are
constrained from doing what you think is right. I think that is
a perfectly appropriate thing for you to tell us, even if there
are disagreements amongst you, and I certainly hope that you
will.
This is a complicated area. You are on new ground. I don't
expect you to get it 100 percent right the first time. I know
you are trying. That is why it has taken so long. Some people
wanted you to rush it and get it done, which I think would have
been a recipe for absolute disaster. You took your time. You
are trying to do it right.
As you move forward, hopefully you will work with us to try
to amend things that maybe you didn't see. I know you will be
looking at the impacts of all the rules that you have. And I
look forward to working with you as we move forward to get it
right, to maintain the American financial services industry as
the leading in the world, as we are today and we will be
tomorrow. And I know that is what you want as well as what we
want. Thank you all very much.
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.
During last month's hearing on the Volcker Rule, I
questioned our panel on the need for coordination of
examination and supervision and enforcement between the five
agencies that are represented here today, along with the
National Futures Association and FINRA. And I don't think their
answers would surprise you, and I think you have heard more of
that here today, some of those quotes.
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 I think it is very lacking in that
respect. That is one observation we heard. Another is, we don't
think you can have five sheets of music, because if the rules
are interpreted differently, I think that is a real problem.
So the first question would go to the concern here on why
there wasn't a coordinated implementation and enforcement plan
developed before the rule was issued. But to build beyond that,
I think setting up a working group and extending the
conformance period clearly does not solve the coordination
concerns, for this reason.
As SEC Commissioner Gallagher pointed out, there is a clear
difference between banking regulators and rule-based market
regulators like the SEC and the CFTC. As he said, prudential
regulators, such as the banking agencies, can indeed employ
their discretion in seeking to obtain their desired regulatory
outcomes. Their prudential regulation and statutory
confidentiality protections, not to mention their embedded
staff's constant interaction with regulated entities, allows
them to bend their rules when they go too far. Those are his
words.
The Commissioner's rules-based regulatory regime, however,
contains no such wiggle room. Our rules, as Mr. Gallagher says,
are rules, and when our examiners come across a rule violation,
whether egregious and intentional or peripheral and accidental,
they are required to record such violations.
So without some further clarification, regardless of the
time you have to work on this, isn't this conflict in
regulatory model going to become an issue? And let's come
around to why that wasn't originally coordinated in terms of
the implementation and enforcement plan developed before this
rule was issued. Because I see this as part of an ongoing
problem, and I would love to hear your response to this and how
we are going to address it.
Ms. White. That is a very good question.
Mr. Royce. Besides you are going to say you have a working
rule.
Ms. White. No. Understood, understood. I think you are
absolutely correct. At the end of the day, we have independent
agencies with independent responsibilities. I think there is an
acute awareness, you are hearing it today from, I think, all
the panelists about the need not only to coordinate and reach
consistency on interpretive guidance, but also on compliance
and enforcement.
And it is true that--I will let Governor Tarullo or the
banking regulators speak to what they do in the way of
supervisory authority and responding to instances of
violation--but clearly our examiners, if they find a violation,
will record it. That doesn't tell you precisely what the
response after that will be. Is it a referral to the
enforcement side? Is it guidance back to the firm in question?
Mr. Royce. It is very complicated for me to understand. If
that happens, you have one agency that says it is market making
and you have another agency that says, no, it is proprietary
trading. It would seem to me that you would want to work this
out, because uncertainty in this is going to lead to real
problems.
Ms. White. No question.
Mr. Royce. Yes.
Mr. Curry. Congressman, we are committed to having
interpretive consistency. I think the issue is we each regulate
separate entities, legal entities. I am the supervisor of
national banks and Federal savings banks. If an activity is
being conducted in the bank, then we will exercise our legal
authorities and take appropriate action that will either
correct or, if necessary, enforce those provisions. We have a
wide variety of tools that we can employ.
But in terms of how the regulation should be applied, I
think we can, and this working group is the vehicle for us
sorting out what the proper interpretation is. And then
ultimately, as Chair White said, we have to do what our
independent agencies are required to do.
Mr. Royce. Thank you, Mr. Chairman.
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 start out by thanking all of you for your work
individually and also as a working group. I understand there
have been 18,000 comment letters sent in. I think you took a
fair amount of time, several years, in trying to work this out
yourself and others, and I think you have come out with a good
result. I think that we understand why all of the Wall Street
banks are against this prohibition of proprietary trading,
because it is a very lucrative business, made even more
lucrative by the fact that it is subsidized by taxpayer
funding.
So when we originally started this discussion, a lot of
fear, or at least a weakness that was pointed to repeatedly was
the fact that U.S. banks, because of the Volcker Rule, were
going to be less competitive with foreign counterparts. And as
Governor Tarullo has pointed out, now it looks like the EU is
moving in our direction, or in the direction of the Volcker
Rule that you have carved out. Both the EU and the Vickers
report as well seems to be pushing in that direction. And so
there are less and less complaints about us being less
competitive and there is more indication that the rest of the
world is moving with us in a good direction.
What I would like to know is, this is so complex and we
have so many exemptions for hedging and market making, what do
you see, as a group and individually, as the threats to
undermining the Volcker Rule? What do you see as the greatest
danger to either, like I say, undermining the prohibition on
proprietary trading, or where do you see the areas in the
Volcker Rule that need reinforcement more immediately?
Ms. White. On the market-making exemption, that's one that
we obviously wrestled with very, very carefully in order to
make certain that we were both being true to the statutory
prohibition against proprietary trading but also true to the
exemption so that the markets could continue to work with the
depth and liquidity they need to. That is an area I think, on
both sides, one will want to closely focus on, both in terms of
possible evasion, but also are there more unintended impacts we
are having that we didn't intend to have on legitimate market-
making?
Mr. Lynch. Great.
Mr. Gruenberg. Congressman?
Mr. Lynch. Sure.
Mr. Gruenberg. I would come back to the importance of
compliance and enforcement here. I think that is really going
to be the key both to the effectiveness and the credibility of
the Volcker Rule. It is a challenging supervisory task to
distinguish legitimate market-making and hedging activities
from proprietary trading. And the thoughtful and effective
implementation of the compliance requirements to monitor that
activity, so that it becomes a routine part of the operations
of the firms overseen by their responsible regulators, really I
think is going to be the key challenge here. If we can do that,
we should preserve the legitimate activities for the firms and
for the markets. And reduce the risks particularly for these
large systemic companies. And I think that would be a
meaningful achievement.
Mr. Lynch. Thank you.
I know that most of the oversight agencies, at least Mr.
Tarullo, Mr. Gruenberg, and Mr. Curry, are self-funded.
Chair White, is your ability to strengthen those areas
threatened by the lack of funding for the SEC?
Ms. White. The lack of adequate funding is a significant
concern at the SEC. We have vast responsibilities, quite apart
from Dodd-Frank and the Volcker Rule and even quite apart from
the JOBS Act, that under current funding levels, we don't have
enough in my judgment to responsibly do what we should be doing
for our markets and for investors.
Mr. Lynch. I agree. Thank you.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, the Chair of our Oversight and Investigations
Subcommittee, for 5 minutes.
Mr. McHenry. Thank you, Mr. Chairman.
In previous hearings, I have asked who the lead regulator
is when it comes to Volcker, and I just figured it out today.
Governor Tarullo, it is you and it is the Federal Reserve,
just based on the answering of questions, the willingness to
step in, and the deference that others on the panel give to
you. I guess when you have five big regulators, independent
regulators sitting on the same panel, there ends up being an
alpha dog.
And, Governor Tarullo, today that is you.
The other takeaway I have from this hearing is that we
still don't know the costs or exactly what this rule will do.
That is kind of clear after listening to everyone's testimony
and the questions we have today and--or the negative impacts
that this rule is going to have on the market.
But, in particular, Chair White, I want to ask you about
rigorous cost-benefit analysis. Now, you had dissenting
opinions within your Commission, saying that there was not a
rigorous cost-benefit analysis performed. What say you?
Ms. White. I say that we basically, I think all the
regulators did--
Mr. McHenry. I am just asking about you.
Ms. White. All right. Just us. We thoroughly addressed the
economic considerations related to the Volcker Rule. The
proposal teed up specific questions to elicit alternatives,
costs, and impact information. I know our economists at the SEC
were very much involved in that. And then I think I have listed
several other important ones where we responded as a result of
that economic analysis and to the comments that raised those
economic impacts.
Mr. McHenry. So where could I see this rigorous cost-
benefit analysis?
Ms. White. I think you will see it if you look throughout
the adopting release to how we addressed the comments that
raised those economic issues.
Mr. McHenry. Do you have specific page numbers or a section
that I could reference?
Ms. White. I could give you some, either provide them to
you after this or give you some now on some of the issues that
I have already mentioned. I am happy to provide it.
Mr. McHenry. In your predecessor's term as Chair of the
SEC, I asked Mary Schapiro about this. She codified as a matter
of policy with the Securities and Exchange Commission a memo in
the summer of 2012 on cost-benefit analysis. Did you adhere to
the principles of that memo?
Ms. White. The guidance wasn't specific. The framework of
the guidance wasn't specifically applied to the adopting
release. This was an adoption. We were authorized under the
Bank Holding Company Act, and all the agencies proceeded in
that manner. I think the reality of the joint rulemaking was
that no one agency-specific individualized procedures were
applied to it. We were all bound under the Administrative
Procedure Act (APA) and complied with that, which included the
economic considerations.
Mr. McHenry. Your predecessor bound your agency to adhere
to the memo and the principles within that memo on cost-benefit
analysis. I will follow up with you on this.
Ms. White. And I am very committed to that guidance as
well.
Mr. McHenry. This is the biggest rulemaking you will
undertake probably in your tenure, probably in my tenure in
Congress. And that is why I think it is important whether or
not you adhered to that principle.
Commissioner Gallagher in his dissent spoke of a fatal flaw
in this rule and asked for a 2- to 3-week delay and re-
proposal. And he also says that it is riddled with problems.
Obviously, you disagree. Would you speak to that?
Ms. White. Ultimately, I know two of our Commissioners and
I independently considered the issue of whether a re-proposal
made sense or was required. I also took counsel on the legal
issue from our General Counsel. It was not required. And my
ultimate judgment was that it also would not be wise to do a
re-proposal. I think, again, we have had a lot of folks comment
both on the panel and among the members about the 2-year period
of conformance during a number of engagements, and both by
comment letters and meetings that we had. There was also
persisting market uncertainty that obviously a further delay
would have perpetuated that. So ultimately, I judged that was
not either required or the right course to take.
Mr. McHenry. I have a final question. It is really just a
yes-or-no question. Governor Tarullo, Chairman Gruenberg, are
you all prepared through a joint process to rule on the second
round of living wills as being insufficient? Are you all
prepared to do that?
Mr. Tarullo. We are right now engaged, the two agencies are
right now engaged in the discussion and the evaluation of the
resolution plans that have come in and what next steps to take.
And so, we surely are moving forward.
Mr. Gruenberg. I think the answer is yes, Congressman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Connecticut, Mr. Himes, for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman.
And thank you all for being here and testifying and for
your very hard work on this complicated regulation. This was
not an easy assignment that came out of Dodd-Frank, but it was
an important one. And I can't help but observe that my friends
on the other side of the aisle with their relentless barrage of
criticism on your efforts and on the concept behind the Volcker
Rule offer, as usual, no alternative. And therefore, we are
left to conclude that they believe that federally-assisted
institutions with access to FDIC insurance and the reserve
window and other forms of taxpayer subsidies should, in fact,
be permitted to take proprietary bets to bet in such a way that
they might be in the future required to turn to the taxpayers
for support. I think that is an unfortunate point of view.
I do think, however, that they and others raise very
significant concerns about the complexity here. And one thing I
wanted to make an argument for in acknowledging, I think, the
very constructive side of your setting up this interagency
working group, I would ask that you consider very seriously
creating a formal process within that interagency group for
banks to obtain interpretive guidance on questions that they
will certainly have. I would further suggest that for clarity
and to avoid some of the concerns that have been expressed here
today, that you formally establish a timeframe--it could be 2
to 3 months, whatever was appropriate--in which a bank or other
entity could get a clear response from this group.
I don't have a question here other than perhaps to ask
whether this, in your estimations, or whether the interagency
group would, in fact, have that as a function and whether you
think it can provide timely interpretive guidance to banks with
questions?
Mr. Tarullo. Without regard, Congressman, as to whether a
formal process with deadlines ought to be established, what
lies behind your question I think everybody here would agree
with, that we need to have a process of getting consistent
interpretations out. Again my expectation would be, but this is
admittedly based on the experience with three banking agencies,
that an iterative process will be really helpful in a lot of
instances where an institution can say, look, this is the kind
of issue we are facing. What do you guys--meaning the
interagency group--think? I think everybody here would say if
it turns out that something more formal is warranted, then we
will certainly think about it. I would certainly think about
it.
Mr. Himes. I certainly appreciate the work that you did and
the speed with which you did it on the trust preferred issue
that perhaps could have been avoided to begin with. But the
speed with which you acted I think was important and hopefully
serves as a model. And again, I would just really urge that
this interaction group has as part of its mandate a formal
process for interpretive guidance.
Just shifting gears here, I share the chairman's concern
and Chairman Garrett's concern about the exemptions for
sovereign and municipal debt. I think they did a pretty good
job of explaining that those two instruments can operate on
both extremes of the credit spectrum. My understanding is that
the rule itself provides no special ability for the regulators
to necessarily control the credit quality of those instruments
which may be subject to this exemption. So my question is,
apart from the ordinary course of business, safety and
soundness, regulators who will presumably be overseeing the
balance sheet of these institutions, is there anything within
the Volcker Rule context that can give us comfort that you will
be vigilant on perhaps lower credit quality, sovereign or muni
debt that could take advantage of the exemptions?
Mr. Tarullo. I would note again that ultimately the Volcker
Rule is about proprietary trading; it is not about the credit
quality of any particular asset. It doesn't go to the issue--I
think as many people have pointed out, there may be some assets
that are high credit quality, at least as issued. And, by the
same token, there may be some that are not, but as long as they
are not held in the trading book and they are not traded, then
they just require a capital charge against them.
Mr. Himes. I do understand that.
Mr. Tarullo. That is the core point, Congressman.
The other thing just, again, to note, the exemption, of
course, for U.S. Treasuries and municipals is something that
was in the statute. The limited exemption that was provided in
the final rule is taking into account the fact that a bank
which is from a particular home country, like a U.S. bank with
its relationship with U.S. Treasuries, is likely to have a
particularly special role for the sovereign debt of its home
country. And that was really the genesis of that.
Mr. Himes. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate it, and
I do appreciate your time being here. And I know my colleague,
Mr. Meeks, on the other side touched on this a little bit, but
I would like to explore our international competitiveness, and
I can't help but note that we are the only advanced economy
that has adopted this prohibition on proprietary trading. And I
am concerned that, therefore, we are creating significant
competitive disadvantage.
It is my understanding, Chair White, that you had talked a
little bit about this in response.
But to my other colleague, it was just bringing up sort of
the absence of a solution. It is kind of like saying I am going
to punish my oldest son for the boneheaded move of one of his
friends that got his friend into trouble, but my son has been
living by the rules and hasn't had any problems. So, the logic
of saying, if we are not going to come up and replace this
Volcker Rule with another rule, somehow we condone bad behavior
by somebody else is ridiculous on its face.
But please explore with me a little bit of how in the world
this does not put us at a tremendous competitive advantage.
Through the contacts I have in Europe--and I worked through the
TLD and a number of other organizations, I have relationships
over there in London and Germany and other places--the
indications that I have had is that they are not going to be
adopting a Volcker-like rule at this point. I have extensive
connections in Canada as well. They are telling me the same
thing. In fact, they are all saying, hey, we will take the
business because you guys are now making it more difficult. So
please, somebody help me with this.
Mr. Tarullo. Congressman, I can go back and say that it is
the case that as of now, nobody has adopted something that
looks like a version of the Volcker Rule. But, as I earlier
indicated, what has been I think worthy of remark is that
immediately after the adoption of the Volcker Rule in the
United States as part of Dodd-Frank, there was essentially no
interest in the concept in other major financial centers. And
in the intervening few years, what we have seen is not just, as
in the case of the European Commission's proposal, something
that looks very much like Volcker, but we have seen in other
countries things that are variants on ring fencing within
institutions, variants on different capital requirements for
different kinds of activities, some of which would go beyond
what we have in the United States.
Mr. Huizenga. So you are willing to wait until they put
something in place to keep us at a competitive disadvantage. Do
you acknowledge that we are at a competitive disadvantage?
Mr. Tarullo. Congressman, whenever one prohibits a firm or
a set of firms from doing anything, there is at least going to
be some change in the ground on which they compete.
I think the question of the magnitude of that is a pretty
important one, and this gets back to Chair White's point about
how market making, for example, which is a vital service that
large broker-dealers play, is something that I think everybody
on this panel wants to see preserved. And that is why, as I
said earlier, the implementation that takes account of the
variations and the characteristics of instruments that will put
it in the markets is important.
Mr. Huizenga. Let's let Chair White address that, then,
quickly.
Ms. White. Just very quickly, I think that the statute
has--obviously mandates that this rule carries out. We were
very sensitive within those parameters of the statutory
mandates to competitive effects. I think I gave a couple of
examples of that. But in terms of the magnitude of the effects,
I think that is something you have to look at, going forward.
Mr. Huizenga. Okay. That was close to being a congressional
answer, in that you gave no answer. But--maybe let's do this.
Show of hands, who here is satisfied with putting the rule in
place knowing that it will put us at some sort of competitive
disadvantage for whatever period of time until the rest of the
world catches up? Are you all comfortable with that? Are you
all uncomfortable with that?
Mr. Tarullo. Congressman, I think I am comfortable with
where we are here. But, again, let's not lose sight of the
reasons why countries put financial regulations in, in the
first place.
Mr. Huizenga. We are not talking about why we have
financial regulations. We are talking about this particular
financial regulation, one that puts us at a competitive
disadvantage, when there hasn't been a problem with it here in
the United States. I heard that someone brought up the London
Whale. All right. That is a completely separate issue from what
we are dealing with here in the United States. So we are not
saying that it is either the Volcker Rule or we are not going
to have any rules, and it is going to be the Wild, Wild West.
The question is, is the Volcker Rule actually going to put us
at a competitive disadvantage with the rest of the world? Does
anybody want to use the last 5 seconds?
Mr. Curry. It is possible. But we need to see what the full
impact of the rule is and we will need to see what other
jurisdictions do to compare what the competitive impact will be
or will not be.
Mr. Huizenga. Mr. Chairman, if you will indulge me, I will
be sending a letter to each one of you asking how long you are
willing to wait. Is it 6 months? Is it a year? Is it 3 years?
What period of time do you need for that information? Thank
you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Delaware, Mr.
Carney, for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman.
Thank you for the opportunity to ask some questions. And I
want to thank all the panelists and associate myself with the
remarks, those that I understood, of the gentleman from
Massachusetts, Mr. Capuano, in praising the panel for your
expertise, your hard work, and your difficult job that you
have.
I was not here when Dodd-Frank passed. I came in 2011. So I
think it would be helpful for me to take a step back, maybe
back to the 10,000-foot level. Kind of where you were with Mr.
Hultgren's question and just ask why you think the Volcker Rule
is important in the framework of things that were put in effect
by Dodd-Frank?
Governor Tarullo, why don't we start with you. You
mentioned capital requirements in your opening statement. Could
you pull it all together and tell us why you think Volcker is
important in that framework?
Mr. Tarullo. Sure. As I think probably many people have
heard me say--more than they wanted to hear--to me, the two key
parts of post-crisis financial reform are: first, higher,
better calibrated capital requirements; and second, addressing
the risks, the run risks associated with the short-term
wholesale funding market. Whatever one's views of the group of
factors that contributed to the crisis itself, there is no
question but that run on short term--runs on short-term
wholesale funding was the precipitating event. That is what we
saw with Bear, that is what we saw with Lehman, that is what we
saw with AIG. So those to my mind are the two key elements of a
post-crisis macro prudentially oriented regulatory system. I
think where Volcker fits in is trying to push a bit at the too-
big-to-fail problem and more generally with the moral hazard
issue of effective taxpayer subsidization of certain
activities, which did not seem to the drafters of the rule
necessary or appropriate for the financial intermediaries who
operate with the benefit of FDIC insurance or potential access
to Fed discount window or relationships with their affiliates
that have similar advantages.
So what I think it tries do is to carve off one kind of
activity that does seem particularly related to moral hazard on
the one hand and, on the other hand, isn't something that the
drafters would feel is necessary to a full-service financial
intermediary.
Mr. Carney. Thank you.
Chair White, Comptroller Curry, would either of you like to
add anything, particularly as it relates to your particular
responsibilities?
Ms. White. In terms of the Volcker Rule, I think Congress
made the judgments that Governor Tarullo is essentially talking
about to try to promote financial stability and to also make it
at least more certain or more likely that the taxpayers are not
on the hook for future distress events.
I think, as a regulator, our primary responsibility is to
carry out those mandates with due regard for impacts on
legitimate market activities and any impacts on the smooth
functioning of our financial markets. And we have tried to do
that in this rule.
Mr. Carney. Comptroller Curry, do you have anything to add?
Mr. Curry. I would essentially agree with Governor Tarullo
and Chair White. I would add that as the prudential supervisor
of the large national banks, I think our focus going forward is
really to make sure--
Mr. Carney. Most of this activity comes under your purview,
correct?
Mr. Curry. Between Chair White and my office.
Mr. Carney. Broker-dealers?
Mr. Curry. Right. So our focus now is really to take the
rule as written and to have appropriate on-the-ground oversight
of those activities.
Mr. Tarullo. Congressman Carney, if you could remind
Congressman McHenry of what you just heard, I would appreciate
it.
Mr. Carney. I would be happy to do that.
I only have a minute left. Chairman Gruenberg, I would like
to go back to Mr. Luetkemeyer's observation with you about the
fund and the mergers that were kind of pushed.
I just finished reading Chairman Bair's book, and she would
argue, I think, that those mergers saved the fund money. Do you
have a comment on that and her perspective? I don't know if you
have read her book or not.
Mr. Gruenberg. The mergers in the short run were part of a
strategy to stabilize the system during the crisis. I think
from that perspective, they were effective. But they did leave
us with a set of institutions that are both large and complex
and diversified that pose significant risks to the financial
system.
And that really comes back to one of the reasons for the
Volcker Rule. The proprietary trading that is the focus of the
rule is concentrated in these large diversified companies with
insured depositories. Pushing that activity out so it doesn't
benefit from the safety net is really what the rule is about.
Chairman Hensarling. The time of the--
Mr. Carney. I just want to thank all of you again for your
great work.
Chairman Hensarling. --gentleman has expired.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney, for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
I think we have had some good discussion today about the
risks and the challenges that the industry faces with possible
conflicts in interpretation, possible competing of interest
between the five groups. I want to talk about that a little
bit. I want to try to get a specific example. I have worked
hard on trying to come up with the perfect example. The best
could I do so far is imagine a situation where we have a large
broker-dealer that also happens to be a bank and it is trading
an interest rate swap in its banking subsidiary. I think that
covers everybody, and I am pretty sure if I can add the proper
counterparties, I could make sure that everybody has some say
in that particular trade. So here is my question: We have this
entity. It is today. It is February of 2014. The rule comes in
place in summer. And they come to you today, and they say,
``Look, we would like to set up our compliance. This includes
things like programming our computers, doing IT.'' Can anybody
explain to me, articulate for me a clear, defined, absolutely
crystal clear path that bank can follow in setting up those
compliance regimes?
Ms. White. You mentioned broker-dealer first. And at the
risk of being accused of being the second alpha regulator, the
SEC is the primary regulator of the broker-dealer. I think we
would be the first stop on that, and obviously, to the extent
that other regulators are involved with other aspects.
Mr. Mulvaney. I want to cut you off. You are the first
stop, but certainly not the only stop. Right?
Ms. White. Right.
Mr. Mulvaney. They go to you first. My guess is that
somebody else might think they are also primary, or certainly
an important secondary. Is there a single plan that this
institution can follow in order to create a compliant system to
meet the requirements of the rule? I think the answer is no, by
the way. I am not trying to trick anybody. But that single
clear plan doesn't exist, does it?
Ms. White. I think, again, that we come to the primary
regulator first. To the extent there were other issues that
other regulators had an interest in, I think, as the primary
regulatory, we would basically initiate those discussions.
Mr. Mulvaney. But if they need it today, that doesn't
exist. Right?
Ms. White. No. It does exist today.
Mr. Mulvaney. So a broker-dealer can come to you and say,
look, this is what we want to trade in next year. And could you
tell them without any concerns whatsoever, if you do X, Y, and
Z, you are going to be fine?
Ms. White. That wouldn't be the initial conversation on the
spot. But, to the extent that the consultation with the other
regulators led to that result, which you would hope it would.
Very quickly, actually.
Mr. Mulvaney. Governor Tarullo?
Mr. Tarullo. Congressman, I think you asked the right
question. But there are a couple of things about this. First,
to a considerable extent, and I don't know exactly what one
hears from everybody, but what I heard a lot of from the
industry was when it came right down to it, they didn't
actually want two very specific sets of quantitative metrics
right now because they were fearful that any set of metrics we
would come up with now would not take into account the
variations in things like relative depth of liquidity.
Mr. Mulvaney. Let me skip ahead in the future, then, and
see if I can articulate another challenge which I am concerned
that we face, which is, this entity is now trading this
particular facility. The Fed says it is okay. And then a couple
of weeks later, the OCC says it wasn't. The Fed says the trade
was okay; the OCC--or, pick one; it doesn't make any difference
who it is. One of you say it is okay; the other says it is not.
Is there a defined, clear regime that they can follow to
resolve that inconsistency?
Mr. Tarullo. Congressman, the trade itself will take place
within a specific legal entity. Whoever is the primary
regulator of that entity has, by congressional delegation, the
regulatory authority over them. So, in the end, they are--
Mr. Mulvaney. And if they say it is okay, then this bank is
fine. It doesn't make any difference what anybody else at the
table says.
Mr. Tarullo. If it is a broker-dealer and the SEC is okay
with what practice the broker-dealer is pursuing, then none of
the rest of us has the authority, under the Volcker Rule and
the statute, to say, no, that is incorrect.
Now, as you have heard all of us say, nobody wants to be in
the position of which de facto there is inconsistent
information being given to people in different legal entities.
So that is what we are striving to avoid. But there is not
really shared jurisdiction over a particular trade that is
going to take place--
Mr. Mulvaney. Why do we need a working group, then? If you
are in charge of one type of trade, why do you have to have a
working group on that trade?
Mr. Tarullo. Because we would want to assure that the same
kind of activity pursued in a broker-dealer or a London
subsidiary of a U.S. bank holding company or a national bank is
treated about the same, even though there are different primary
regulators. That is the reason for the coordination.
Mr. Mulvaney. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. I have been listening to this hearing, and it
sounds like Wall Street. It sounds like the interior pages of
the Financial Times. And I want to try to bring this down to
how it is going to affect local businesses in our own
districts.
Because this Volcker Rule is going to prevent certain
entities from buying and holding certain securities under
certain conditions. We have plenty of entities that will invest
in the S&P 500. The super creditworthy, super prime borrowers
are getting lower interest rates and better terms than at any
time in decades. And the American economy, if it fails, will
not fail because, in 2014, there weren't enough entities and
funds and hedge funds buying stocks and bonds from the biggest
corporations. If we fail, it will be because you can't get a
$250,000 loan for a startup business; you can't expand your
business and get a $10 million loan. The $50 million financing
necessary by medium businesses is completely unavailable.
Now, sitting where the witnesses are now, we had Jamie
Dimon awhile ago, who said he just couldn't find good business
borrowers in the United States. He had all this money, and
didn't know what to do with it. He sent it to London, and it
was eaten by a whale. All of us in every part of this room know
good businesspeople who should be getting loans and aren't
getting them. And those are the businesses that are going to
have 100,000 employees 20 years from now, 10 years from now if
they get financing, and we have a system where they can't.
We have big banks that only want to buy securities. They
are itching to make big bonuses on the sophisticated financial
transactions involving tens of millions of dollars or hundreds
of millions, billions.
And then we have regulators, who I am told when you see a
loan at prime plus 5, prime plus 6, instead of saying thank you
for making that loan to a business that isn't perfectly
creditworthy, you need a little bit more capital to do that,
instead, regard the banker as somehow betraying the financial
system for doing what Jimmy Stewart told us in ``It's a
Wonderful Life'' a bank is supposed to do.
What can you do as regulators to prod the banks into making
those small- and medium-sized business loans, instead of using
all their capital on Wall Street? And what can you do as
regulators to stop penalizing banks because they make loans
where there is a 1-in-20 chance that the loan will go bad, even
a 1-in-50 chance that the loan will go completely bad, and ask
only for reasonable reserves, rather than a view that the bank
has violated its charter by making a prime plus 6 loan? I will
address that to anyone on the panel. Mr. Curry?
Mr. Curry. Congressman, from our standpoint, as a
prudential regulator, we do want to see banks lend to
creditworthy borrowers. And that is really--
Mr. Sherman. If I could interrupt, it used to be that
character mattered, that relationships mattered. That banking
was an art and you evaluated whether the person could pay you
back. Do you let your regulators look at that at all, or is
character thrown out the window?
Mr. Curry. We look at underwriting processes that the
individual institution has. As long as they adhere to safe and
sound underwriting practices, that should be it.
Mr. Sherman. It is now--I wish that was true in the San
Fernando Valley, sir. All I hear is, ``We made a loan; the fair
rate of interest was prime plus 5; therefore, we were in
violation of what the regulators expected us to do.''
Let me ask one more question. And that is, this whole
Volcker Rule is designed to prevent the need for future
bailouts. But the fact is that as long as we have institutions
which are too-big-to-fail, they are going to engage in risky
behavior, especially if they are not banks. And then they are
going to come to Congress and say, We are going to pull down
the entire economy with us if you don't bail us out.
This bill gave you the right to break up the too-big-to-
fail. Why aren't you using it?
Chairman Hensarling. Seeing no witness take up the question
and given that the time of the gentleman has expired, the
witnesses may answer in writing.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
And I thank each of you for being here today. Much has been
said from my colleagues on the other side today lauding the
Volcker Rule, as they have hundreds of other rules that have
been promulgated, lauding Dodd-Frank, lauding your efforts. I
think, frankly, it just bears some questions in my mind as it
relates to the implementation of this rule and the impact it
will have.
I quote Mr. Volcker. He acknowledged that the activity
sought to be prohibited by the rule had nothing to do with
causing or exacerbating the recent financial crisis.
Mr. Geithner said, ``If you look at the financial crisis,
most of the losses that were material for the weak institutions
and strong relative to capital did not come from those
proprietary trading activities. They came overwhelmingly from
what I think you can describe as classic extensions of
credit.''
So it begs the question to me of the importance of this
rule and the impact it is going to have in a counterproductive
way. What do you say to the American people, what do you say to
those consumers, to those banks who can't find capital, to
consumers who need help with their businesses, to the
compliance costs of these banks and the time afforded, that the
impact of what we are having, if, in reality, those who would
seemingly know best have said that it had really no core
relationship to the financial crisis as relates to systemic
risk?
What is your opinion of that? And if we don't have a clear
understanding of that, where do we go from here? It is
troubling to me that so much has gone into this now, this
enormous impact of this rule on top of rule after rule and the
impact it is going to have. Could you kindly comment on why we
are here today?
Mr. Tarullo. In the first instance, Congressman, we are
here today because you called a hearing asking to get an
explanation of what we did to implement a law that Congress
passed. And in the first instance, I think many of us have
mentioned this, but we do have to come back to the fact that
this is a judgment that Congress made, and it is, as I tried to
explain earlier, I think, a piece of a broader regulatory
system that is being put in place post-crisis. So I think that
is probably the most important point. And we are obviously
bound to implement whatever it is that Congress passes.
Second point, as I did say earlier, is I think--
Mr. Pittenger. Quickly, because I would like to hear from
four other people.
Mr. Tarullo. Okay. If you ask those who developed the
Volcker Rule in the first place, possibly even including former
Chairman Volcker, I think they might say--
Mr. Pittenger. The point is, though, they said clearly it
had nothing do with systemic risk.
Mr. Tarullo. I think what they would probably say--
Mr. Pittenger. But that is the point that my colleagues are
making, that we just don't get it.
Mr. Tarullo. As you try to adjust a financial system to the
integration of capital markets and traditional lending, they
would say you have to be aware of the problem already
encountered but other problems that you might encounter.
Mr. Pittenger. Thank you.
Chair White, do you have any comments you would like to
make?
Ms. White. The only thing to add is that Congress again
made the judgment that the Volcker Rule would promote financial
stability and protect the taxpayers from future crises and
losses.
Mr. Pittenger. They did make that decision, my colleagues
on the other side of the Dodd-Frank bill. It just begs the
question to me if, in fact, it had no bearing according to
these apparently major individuals in the financial world, Mr.
Volcker, Mr. Geithner, it begs the question seriously to the
American people and to financial institutions the impact it is
having in terms of availability of capital as well as the
compliance costs related to it.
Any other comments?
Mr. Gruenberg. Only to acknowledge that I think former
Chairman Volcker in proposing this idea perceived these
activities as posing systemic risk. And I think he, from his
perspective, which was the impetus for this, saw it as a
significant source of systemic risk going forward. And that is
what he proposed addressing. I can't disagree with that
premise--
Mr. Pittenger. So we are an answer looking for a problem.
That is what was stated earlier. Thank you. Would you like to
make a comment?
Mr. Wetjen. I was just going to add something similar to
what Chairman Gruenberg said. I think it is also a prospective-
looking policy as well.
Mr. Pittenger. Thank you very much.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Foster, for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman.
And thank you to the panelists.
I would like to return for a moment to the CLO issues.
Chairman Gruenberg, on, I guess, page 10 of your testimony,
you mentioned that securitization that currently includes
assets other than loans can be excluded from the definition of
covered funds if they divest impermissible assets during the
conformance period.
And my question to you is, is that really realistic in
light of the fact that the managers of the securitizations
actually have a fiduciary duty to all their investors and not
just some bank that may have a relatively minor position in the
fund? And how would you get past that legal morass on the time
scale needed?
Mr. Gruenberg. As I indicated earlier, I think in many
cases, it is feasible for that to be done. As you indicated,
for CLOs in which they are only made up of loans, they are not
subject to the Volcker Rule. There are the category of CLOs
that have impermissible assets. I think--and there are a lot of
those which have relatively small numbers of impermissible
assets, a small volume. I think in that case potentially
divesting those assets, so-called curing the CLO for purposes
of compliance with the Volcker Rule is manageable. For others
with larger numbers of impermissible assets, it poses a greater
challenge and I think would be the focus, frankly, for our
review of the issue.
Mr. Foster. I would like to just ask more general questions
about the grandfathering and the legacy issues that Governor
Tarullo mentioned. For example, the immediate mark-to-market
that is triggered when you have to sell these things, there is
a potential, I guess, for possible capital relief, if that gets
triggered. And just the need for clarification is I think very
important. If you look at the drop in new CLO issuance, which
has been going around at maybe 6 billion a month has now
dropped to less than 2 in the last month, sort of underscores
the need for clarification as soon as possible on this.
And just the other area that is important for--as it
relates to grandfathering is just the fire sale scenario and
what can you do to mitigate that if in fact there is a big
class of these that has divested. So do you have any comments
on this, just general comments on the range of the most
aggressive grandfathering, the least aggressive grandfathering
that you can imagine emerging from future deliberations?
Mr. Tarullo. Congressman, as Chairman Gruenberg indicated,
I think those are several of the issues that we want to get
more information on, which is to say first the breadth of the
issue. Because if we are not facing that widespread an issue,
the fire sale problem is probably going to be minimized. But if
that is not the case, then you say, okay, is the timeframe that
is already provided adequate? And, of course, that actually
depends on whether the instrument in question has been
depreciating in value or appreciating. But we are getting
information on this, and I think we will have more, and we will
be able to make a more granular decision on the questions that
you pose.
Mr. Foster. Do you have a time scale when you might make
those decisions?
Mr. Tarullo. I don't want to speak for everybody in saying
we have a timeframe. I think, as I said earlier, and as
somebody else reiterated, it is the top of this list of this
interagency group to be addressed. It is the second of the
important interpretive issues.
Mr. Foster. I guess I have time to change topics for a
moment. In the securities lending part of the Volcker Rule, I
was struck by, I guess, that at the point the Government seized
AIG, 40 percent of the losses were from securities lending. So
this is not necessarily a safe operation in all business
conditions. I was just wondering if everyone here is satisfied
that what is done in securities lending is going to--obviously,
AIG was not a bank. But those sorts of losses would be
prevented in advance by the way securities lending is dealt
with.
Mr. Tarullo. I, myself, do not, Congressman. This is one of
those areas where, as I said in my prepared remarks, we can't
rely just on the Volcker Rule to assure the safety and
soundness of trading operations. And I do think under this more
general heading of addressing the risks associated with short-
term wholesale funding, that the risks associated with
securities financing transactions and the margining practices
do need to be addressed for just the reasons you identify.
Mr. Foster. Okay. Thank you very much.
I am almost out of time. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Illinois, Mr. Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
And I thank you all for being here. I want to start quickly
just by commending the regulators represented here for
acknowledging in the preamble this impact disruptions in the
tender option bond market may have on municipalities and the
market for certain municipal securities. I certainly hope that
as banking entities who wish to continue participating in this
market, as they work to make their tender option bond vehicles
Volcker-compliant, that they will find your cooperation and
assistance. I think that is very important.
I want to address this first question to Governor Tarullo.
And ask if any of you have responses, as well. But how can one
posit that a $6 billion trading loss, which resulted in no
taxpayer losses and resulted in a profitable quarter and year,
evoke outrage, but a loss of twice as much in regulatory fines
is never mentioned? Is that illogical? And should we no longer
fine Wall Street banks because it threatens the stability of
the financial system?
Mr. Tarullo. Congressman, I think that the concerns
elicited by the Whale episode were the concerns associated with
the problems that led up to it, that is, why did it occur? Why
was risk management not being applied to the activities of the
firm? It is a very good thing that the firm was as highly
capitalized as it was. And, it underscores what I have always
said is the importance of having a very well-capitalized firm
because it can deal with unanticipated as well as anticipated
problems. Just as if one saw an instance in which there had
been a very poor underwriting job done of a particular loan
which turned out to result in a loss that the bank could take,
we would think our bank examiners would be negligent if they
didn't go back in and ask, are other such problems
proliferating and do you have systems in place which manage the
risks correctly? And I think that was what the London Whale
episode did. It showed a variety of infirmities in risk
management, documentation of hedging, which directly do relate
to the concerns of Volcker. But--
Mr. Hultgren. I understand what you are saying. I do think
there is--you also look at just the discrepancy of how things
are approached, where regulatory fines are not acknowledged.
And yet oftentimes are double the amount, oftentimes. I just
think there is a question there of how we approach these
things.
Let me move on. I only have a couple of minutes here. I
wonder if I could address this to Chairman Gruenberg. Some
banks are certainly waiting until July 2015 to divest
themselves of Volcker-prohibited securities. Prompted by the
rule, we have already seen banks of CLO and re-REMIC
portfolios. But in the case of re-REMIC, the status of these
securities under the rule seems unclear. At least my office has
heard calls for clarification. I wonder if you could please
explain the status of re-REMIC securities under Volcker and if
the treatment is universal, or are there different treatments
for some agency re-REMIC securities compared to others?
Mr. Gruenberg. Without getting into the--that is certainly
one of the issues on our list to be reviewed, in addition to
the tender option bonds and municipal securities issue that you
mentioned at the outset. So, I would add the re-REMICs to that
as well.
Mr. Hultgren. Say that again? I'm sorry.
Mr. Gruenberg. I would add the re-REMICs category to the
first two issues you raised in your comments in regard to
tender option bonds and municipal securities as matters that
have been raised in terms of the application of the Volcker
Rule and issues for us to review and consider.
Mr. Hultgren. Again, I would echo from the opening remarks
that I hope we can count on your cooperation and assistance.
Because, again, I am hearing from folks back in Illinois,
concern, uncertainty of knowing how these are going to be
handled. So as that moves forward, I appreciate that it is a
priority. My hope is that there will be good communication and
cooperation as we work through further understanding of what
they can expect here.
In my last minute, I will open this up to anyone. This may
get back to a lack of thorough economic analysis. But I wonder
if any of you have seen or tried to estimate the impact of a
Volcker-promoted forced sale of certain securities on the
markets for those securities. And particularly, how will this
affect community banks? Won't a forced sale in any part of the
market drive the prices down and hurt potential returns?
Mr. Curry. Congressman, that is certainly an issue that we
are going to address as we review the CLO issue. So, it is a
matter of concern.
Mr. Tarullo. I think--just to supplement that--we have
probably heard from those who think that they are in that
situation. The TruPS issue quite possibly did pose, did pose
that risk. It is not clear, at least based on current
information, that there are other categories of things that
would be subject to short-term divestiture which would provoke
a fire-sale-like reduction in prices. But as others have said,
that analysis of those things will continue.
Mr. Hultgren. My time has expired. I yield back. Thank you,
Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison, for 5 minutes.
Mr. Ellison. Let me thank the chairman and also thank all
of our witnesses today.
I would just like to ask for unanimous consent to enter a
particular article into the record from the American Banker.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Ellison. It is entitled, ``Volcker is Right. Prop
Trading Kills,'' and it is by Donald R. van Deventer. And he
essentially makes the following point, that I agree with:
Congress asks you to prevent banks from engaging in proprietary
trading because there is ample evidence out there that
proprietary trading in certain cases resulted in harms to
firms, families, the Nation, and our global economy. And it is
not just JPMorgan Chase and the whole London Whale case. It is
also Citigroup. It is also Bank of America, Morgan Stanley, and
the Royal Bank of Scotland. These banks used their deposit
insurance subsidy to trade in high-risk investments. Those
instruments failed, which would have caused these financial
Goliaths to fail but for government assistance.
So, I just put that in there. If you care to comment on
that, my comment or this article, feel free to do so. But I
think a lot of my colleagues have gone over the Volcker Rule in
particular. So because it is not all the time that I have this
kind of expertise here, I am going to ask about some other
things.
First of all, I would like to ask Mr. Wetjen a particular
question. Mr. Wetjen, I am a supporter of fair, robust
regulation of financial markets. I am also concerned that the
SEC and the Commodity Futures Trading Commission don't have
adequate funding to do the job we have asked them to do. I
wonder if you would reflect on what I just said. If you were
funded at, say, an additional 5 percent of your current level,
what would you be able to do to build on your efforts to
oversee the market? Could you address this issue?
Mr. Wetjen. Congressman, I appreciate the question. As I
mentioned in my opening remarks, we are resource-constrained at
the CFTC. We have taken on significant new responsibilities
since the passage of Dodd-Frank, mostly as it relates to
derivatives reforms under Title VII, but also as it relates to
Volcker. So it continues to be a challenge. We do need
additional staff. We do need additional technology investments
to help decipher, make sense of the data that has been coming
in for a number of years. But some of the additional data
related to swaps has come in more recently, within the last
year. So, it is definitely an issue of concern for me.
Mr. Ellison. Thank you, sir.
Ms. White, would you like to address this issue?
Ms. White. Yes. Thank you for the question as well.
The SEC, again, as I said earlier, we are resource-
constrained. And in order to carry out the really vast
responsibilities we have, even apart from Dodd-Frank
implementation issues and JOBS Act implementation issues, we
need more people to do that, more experts to do that. So, we
appreciate the question.
Mr. Ellison. Thank you.
And sticking with you, Chair White, on December 12, 2013,
the Consumer Financial Protection Bureau (CFPB) released the
preliminary results of their study on the use of mandatory pre-
dispute arbitration provisions in consumer financial products.
The study found an overwhelming majority of consumers must
participate in mandatory pre-dispute arbitration agreements.
Your agency, like the CFPB, was given authority under Dodd-
Frank to act to study the use of mandatory pre-dispute
arbitration clauses in customer contracts.
I am concerned about the prevalent use of these clauses and
contracts that investors in my State and across the Nation
signed as a condition to working with their brokerage and
investment advisor firms. Is this a cause of concern for you?
Do you have a position on these pre-dispute arbitration
provisions? And have you had a chance to study the effect of
these contracts?
Ms. White. There are very strong views on that issue, on
both sides, as you have indicated. A number of people have
raised serious concerns about that. At the Commission, we have
the authority to decide whether to act and what to do about
that. We have not yet come to an agreement on that. We clearly
will have further briefings from the staff on that and focus on
that in the relatively near term. But I can't tell you what the
outcome will be at this point.
Mr. Ellison. Okay. All right.
I think I have a few seconds to go. And with that time, I
would like to just see--Mr. Curry, if you don't have time to
answer, if you could just respond in writing. I have had a lot
of constituents with Islamic-sounding names telling me they are
losing access to bank accounts. I wonder if you have seen this
coming up, if it is something that has come to your attention,
and if there is any response you may have.
I see the light is red. Maybe could you respond in writing.
Mr. Curry. I would be happy to get back to you. I
understand that is an issue in your district, and we are
looking into it.
Mr. Ellison. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Missouri, Mrs.
Wagner, for 5 minutes.
Mrs. Wagner. Thank you, Mr. Chairman.
And thank you, panelists. This committee has received
voluminous testimony from corporate CFOs, community banks, and
academic experts that the costs of the Volcker Rule will dwarf
its highly speculative benefits and that the rule will do
significant damage to job creators and to our economy. In fact,
the chairman referenced in his opening statement the academic
research conducted by Washington University in St. Louis, in my
district, which concluded that the Volcker Rule will take $800
billion out of the economy.
Now, given the extensive evidence and testimony from those
on the ground that the Volcker Rule will do far more harm than
good, and given that you did not do a formal cost-benefit
analysis, can someone on the panel please let me know what your
evidence is to the contrary? Because I can't find the benefits
in your 932-page rule.
Chair White?
Ms. White. I would say this, as I said earlier, obviously,
there was, to begin with, a congressional judgment made to
require the Volcker Rule. The agencies are all charged with
carrying that out to be both faithful to the statutory mandate
but also very--which is part of the statutory mandate, also
very sensitive to the exemptions from that rule. We clearly,
all of us in the process of this rulemaking, from the proposal
stage to the adoption stage, solicited information and data and
analyzed data on the impacts.
Mrs. Wagner. What are the results of that data?
Ms. White. I think you saw the results of that. That
inquiry and analysis led to changes that I talked about earlier
in order to reduce some of the negative impacts of the rule,
the costly impacts of the rule. But we began with a statutory
mandate to carry it out.
Mrs. Wagner. I listened to some of your testimony. And
specific to the SEC, Chair White, I think you said you
thoroughly addressed the economic considerations of the rule.
And I am trying to figure out where that is. Has a formal cost-
benefit analysis been done on this by the agency?
Ms. White. It depends, I guess, to some extent what you
mean by ``formal cost-benefit analysis.'' The statute--
Mrs. Wagner. Where is the report? Where is the research?
Where is the information? Where is the report?
Ms. White. The statute under which we enacted the rules of
the Bank Holding Company Act, it doesn't specifically require
or even implicitly require a formal cost-benefit analysis. What
we did do, all five agencies did do, was to tee up a full range
of questions as to the economic impacts, and solicited the
data. And if you look at the adopting release, you will see
those discussed throughout in terms of the agency's thinking on
that and conclusions on that.
Mrs. Wagner. A lot of others have sure done analyses of
these. And all I am seeing is cost, cost, cost, cost, cost
coming from the business side, from the academic side, and from
many experts on this. And I would be very interested in knowing
just where specifically in all of the analysis that you have
done, where the benefit side of this is. I would submit that
this is a very costly rule to our economy and to the American
people.
Turning to something different, following up on Mr.
Mulvaney's line of questioning, I am a little concerned about
this working group and who has the power of enforcement, what
lanes each one of your agencies are staying in. Who is in
charge of the working group that you formed? Have you formed a
working group?
Mr. Tarullo. Yes. But by definition, as with all
interagency committees, the agencies are independent and they
each have a role, which has been given by statute.
Mrs. Wagner. Who is in charge of the working group?
Mr. Tarullo. Nobody is in charge of the working group.
Mrs. Wagner. Have each of you assigned somebody to the
working group?
Mr. Tarullo. Yes.
Ms. White. Yes.
Mrs. Wagner. So you have a list of those who are assigned
to this working group. For instance, will the SEC's Enforcement
Division have to consult with the working group before opening
a Volcker Rule investigation?
Ms. White. The answer to that is we are not required to do
that, no. We are an independent agency and are not required to
do that. Again, however, everyone is focused on consistency
across the agencies.
Mrs. Wagner. You are focused on consistency, you each have
your areas of jurisdiction, you say you have formed a working
group. I am just confused as to who has the power of
enforcement, and what happens when you differ?
Perfect example: Let's say the OCC approves a trade or a
trading strategy that a bank is doing, and then 6 months later
the SEC comes in and says that those trades were in violation
of the Volcker Rule. How do you resolve that conflict?
Mr. Curry. At the OCC, we supervise the national banks and
Federal savings banks. We have the authority and we examine on
a regular basis to see if they are in compliance with all
rules, including the Volcker Rule. If they are in violation of
it, we have the enforcement authority. If it is a question of
judgement as to whether--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Florida, Mr.
Murphy, for 5 minutes.
Mr. Murphy. Thank you, Mr. Chairman.
And I want to thank all of the witnesses for your time and
your testimony today.
I know this has been talked about quite a few times today
already, but I just want to follow up. Last December we had
Secretary Lew here in front of the committee, and I asked him
how the five agencies that are here today were going to split
up the responsibility of implementing and enforcing the Volcker
Rule.
He said the current regulatory structure would flow through
to the Volcker Rule depending on an institution's primary
regulator and the products they trade. However, there are quite
a few financial institutions in our country that are working to
try to comply currently, and it has become clear to us that two
or more different agencies could be responsible for supervising
and enforcing the Volcker Rule for one institution.
How is this going to work and who is ultimately going to be
responsible for each of these discrepancies? And we can just go
left to right.
Mr. Tarullo?
Mr. Tarullo. Again, Congressman, there will only be one
primary regulator for any given financial institution or an
affiliate within a bank holding company. That is the way the
law allocates responsibility.
Mr. Murphy. And they will know ahead of time, they will
know as of now--
Mr. Tarullo. Yes. Broker-dealers know who they are, State
member banks, non-member banks, yes.
The inconsistency issue comes up across either different
affiliates or different institutions. It is the effort to
assure consistency in interpretation within broker-dealers on
the one hand and national banks on the other that animates the
coordination efforts.
Mr. Murphy. I see some heads nodding, but is everyone in
agreement?
Ms. White. If I could just add, taking broker-dealers,
again the SEC is the primary regulator of the broker-dealer,
primary examiner of broker-dealers as well, and will in fact be
primarily responsible for their compliance with Volcker.
Mr. Murphy. Okay. Mr. Curry?
Mr. Curry. It is our goal from the beginning to make sure
that we have consistent application of the rules. We view this
working group as the mechanism for doing it so that when we do
apply it to the entities that we regulate as the primary
supervisor, in my case national banks and Federal savings
banks, we know that we are doing it in a consistent manner,
that there is not a material difference between the treatment
between a bank versus a broker-dealer under a bank holding
company.
Mr. Gruenberg. The issue here is created by the fact that
we have diversified financial companies in the United States
with multiple entities with different functions and different
regulators. So you could have in the same company a national
bank, a broker-dealer, and a State-chartered institution, all
under a holding company structure, each with a regulator
responsible for the activities of their particular part.
So coordinating that is really the challenge. It is why all
of the agencies here have responsibilities for some part of
that diversified firm, and it is why the rule required all of
the agencies here to participate. And the challenge of
implementation is really going to be identifying the lead
regulator for the part of the company that is impacted and
having that regulator engage with the others. And that is a
process that goes on in other areas of financial regulation, as
has been pointed out, and is clearly going to be a key
challenge here.
Mr. Murphy. Mr. Wetjen?
Mr. Wetjen. Thanks, Congressman.
The only thing I would add is that the statute makes it
very clear that we have an obligation to coordinate. And the
other point I would make is something I mentioned in my oral
statement, and Governor Tarullo reiterated it today at the
hearing, which is there have been opportunities for at least
the CFTC and the SEC to go their own way given what was
required in the statute. That is not the choice that was made.
Instead, we went beyond what was required in an effort to try
and be faithful to the requirement under Section 619 that we--
Mr. Murphy. We are running low on time here. I just want to
follow up, and I am wondering if you all fear that there are
going to be different interpretations? And the reason I ask
this is because when Secretary Lew was in here, he expressed
confidence that, ``This leaves some space for supervisors to
engage with the entities that they supervise to work through
some detail.''
So if this is a constant process of interpretation, how do
we ensure that there is consistency?
Mr. Curry. Again, we decided that it was important to have
a formal forum, and the working group was created for that
purpose.
Mr. Murphy. So all in the working group? Okay.
Mr. Tarullo. It is probably important to note, Congressman,
that a lot of the issues, particular kinds of instruments that
are traded at broker-dealers, are not likely in many instances
to be traded at national banks. So in a lot of cases, they
actually won't be things that cross a lot of lines, but in some
they are, and that is where the coordination and consistency
mandate comes in.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
It has been interesting reading some of the reports that
have come out about you all working together, the dysfunction,
withholding documents, backstabbing, cutting people out,
soliciting to get people to come across town for fried chicken.
It is kind of like Congress. Maybe that was very effective.
You have had a lot of questions about the proposed rule and
final rule and a lot of commentary about the economic analysis,
and I am going to stick to those topics. I think it is fair to
say that there was concern that the questions that were brought
up in the proposed rule were far different than the actual
final rule. And many of us argue you should have reproposed the
rule to solicit further commentary.
I think a perfect example of that is there was surprise
with regard to the CLO issue and the TruPS issue. Had you
reproposed the rule, you would have been able to solicit
commentary and get some insight into folks' concern.
Why didn't you repropose the rule? The best reason I have
heard is, we had an arbitrary timeline that we were trying to
meet. But beyond that, it makes sense that you would have
reproposed it and solicited comments. Why didn't you do that?
Ms. White. As I said earlier, that is an issue that I
considered independently. I think two of my Commissioners have
commented on that. And the judgment was made, both in
consultation with counsel, there was no requirement, given
where the adopting rule was coming out, that we repropose.
Mr. Duffy. With all due respect--
Ms. White. But we had a 2-year period of extensive input.
And we teed up some of the questions that could have elicited
some of these facts that have come out since then.
Mr. Duffy. There are requirements and there are best
practices. And you are aware of best practices as well.
Ms. White. Absolutely.
Mr. Duffy. And, I would ask you all, how many comments did
you receive about CLOs and TruPS? Probably not very many,
because it wasn't included in the proposed rule. And there was
a whole slew of issues that don't match up. And I think the
best practice, though you may not have been required, would
have been to repropose the rule and get additional input from
participants. And I still haven't heard a good reason why you
wouldn't have done it except for this arbitrary timeline.
Does anyone have a better reason?
Ms. White. It wasn't an arbitrary timeline. I made the
judgment that there was market uncertainty out there as well,
we had had a 2-year period of extensive engagement on these
issues, and that we should go forward.
Mr. Duffy. We are talking about market uncertainty, and I
don't think we have done much to alleviate that. We might have
aggravated the problem of uncertainty with the rule itself. And
frankly, I think, Ms. White, you had said that it wasn't wise
to do a reproposal, which doesn't make sense to me, either.
But I want to move on to the economic analysis. Ms. White,
you have indicated that an economic analysis was done, I think
you referenced the preamble to the rule. But you are very well-
versed in doing economic analysis at the SEC. You are required
to do it for the rules that you put out, the Division of
Economic and Risk Analysis. Did you do one of those for the
Volcker Rule?
Ms. White. As I said earlier, I think what you are alluding
to is our guidance, which actually does not require that it be
applied, but I am a great proponent of that.
Mr. Duffy. Binding guidance, yes.
Ms. White. In this instance, again, we all as regulators
really thoroughly addressed the economic considerations.
Mr. Duffy. No, no, no--
Ms. White. Because it was a joint rulemaking, the dynamic
of the joint rulemaking, I know that no agency's specific
guidance applies to each other.
Mr. Duffy. My question for you is simple: Did you do it?
Ms. White. But we did do the analysis I have described.
Mr. Duffy. You didn't go through the appropriate channels
of doing an economic analysis which you do for other rules that
you implement, right? No. You did not do that.
Ms. White. The framework of our guidance wasn't applied,
but we did--
Mr. Duffy. If you did that analysis--
Ms. White. --absolutely thoroughly consider economic
considerations and responded to them.
Mr. Duffy. If you would send me the report, I would love
that.
Do you object to now, ex post facto, doing an economic
analysis, as done by the Division of Economic and Risk
Analysis, per the memo from Ms. Schapiro?
Ms. White. Again, I think we have done that analysis and we
are focused on implementation at this point.
Mr. Duffy. You have done that analysis, the Division of
Economic--
Ms. White. We have done the economic analysis that I have
described and I think--
Mr. Duffy. Do you object to doing the one that is
consistent with the memo of Ms. Schapiro when you do other
rules through the SEC? Will you do that same analysis for us ex
post facto? Yes or no?
Ms. White. Even though we have--
Mr. Duffy. Is that a no? I only have a couple of seconds
left.
Ms. White. The guidance wasn't applied. I don't think it
would be constructive at this point to do that, for the reasons
I have indicated.
Mr. Duffy. And I guess just quickly, I have a bill out that
will amend Section 13 of the Bank Holding Act. So if you are
going to make any modifications to the Volcker Rule you
actually go through an economic risk analysis. Any objections
to going through that process should there be any modification?
My time is up, Mr. Chairman. I hear you pounding the gavel.
I will yield back.
Chairman Hensarling. If the gentlelady wants to give a
quick one-word answer?
Ms. White. I think I answered, sir.
Chairman Hensarling. Okay.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
And I thank each one of you for being here today.
I think it was Mrs. Maloney earlier in the hearing
suggested that we concentrate on implementation. There has been
a veritable cascade of questions on implementation, and that is
where mine will fall. The subject has been finely tuned at this
point of the hearing.
Mr. Himes really got down to the point. Chair White, you
had affirmed that we have an acute awareness that we need to
work together. And I am not sure exactly what Mr. Tarullo might
have said that got him the alpha, whatever designation he got,
but something along the lines that the process is well-
established and we don't see why we would have trouble.
But Mr. Himes went ahead and got a little more focused and
said, are you going to have a formal process? And I think your
response, Mr. Tarullo, was that if it is so warranted, yes, we
will do it if, it is warranted.
And I guess my question is, are there circumstances that
would warrant it that you can come up with in the recent past,
or circumstances where you really come together and you all
agreed on who said the football went over into the end zone. So
are there good examples of coordination or bad examples of lack
of coordination?
Mr. Tarullo. Congressman, I think as you and a number of
others have suggested, at least implicitly, this is a new kind
of exercise here, because it has the banking regulators for
whom there is a long track record of coordinating on an ongoing
basis with the market regulators. So I don't know that the
precedents based on the bank regulatory cooperation will carry
over. I think they will.
The reason I answered earlier that at some point something
more formalized could be useful is because I just don't know at
this juncture whether the success in having three agencies with
staffs who have known one another well in doing coordination,
all of whom are bank regulators, will carry over. I think it
will, but it may not. And if it doesn't, then we may need to
formalize things a little bit more.
Mr. Pearce. I think from this side of the aisle, I would
refer to a Washington Post article of 2012, and it is referring
to exactly such a circumstance. It leads in saying that part of
the problem is that the different agencies weren't
communicating, specifically talking about the SEC.
Mr. Wetjen, Mr. Luetkemeyer was the last to call on you.
But with your two agencies, within the final paragraph or next
to the last paragraph it says, when the agencies began talking,
they worked at cross purposes. The report said that in one
instance the SEC asked MF Global not to take the money set
aside to help cover funds owed to the securities customers,
while the Trading Commission told the firm to do exactly the
opposite, to cover the firm's future customers. And so that
resulted in $1.6 billion being taken out of segregated
accounts. And we have people sitting in the room who are
supposed to stop this. It is against the law to do that. And
the regulators on such a major issue are exactly opposite.
And so you heard Ms. Wagner's questions. Who is driving?
Who will be the one to cut the baby in half or whatever we are
going to do to make a decision here? I think there is a need
for a formal process. I went through the table of contents of
your stuff, I didn't go through the full 900 pages, I thought I
could find it, to where maybe you did address that if we come
to a crossroads, that so and so is going to be the alpha male,
female, or whatever--I don't know if I would use the word that
Mr. McHenry did--but still somebody has to be in charge,
otherwise we wind up with customers getting nailed for $1.6
billion.
Have you done a postmortem between the two agencies, how
did this thing occur, that the regulator is sitting in with
Senator Corzine and he takes $1.6 billion?
There was another article, by the way, which says the
authorities came to believe that an employee in MF Global's
Chicago office transferred the customer money, perhaps
inadvertently.
Do you know how that sounds to our constituents, just an
inadvertent transfer of $1.6 billion? Did you do a postmortem,
either one of you, of the whole group? Has the working group
sat and looked at the MF Global circumstance to say there are
really reasons we need a process here?
Mr. Wetjen. I think, if I could say, the real postmortem in
the MF Global situation is that while it is obviously a
horrible circumstance where for some amount of time there were
customers--
Mr. Pearce. Could you speak up just a bit? The postmortem
was what?
Mr. Wetjen. I'm sorry. What I was trying to say is that the
real postmortem is that while there were customer moneys lost
for some amount of time, they are all going to be recovered in
the bankruptcy process.
Mr. Pearce. Okay. Mr. Chairman, please, I know I am over,
but I am hearing one of the top regulators in the country say
no harm, no foul. I'm sorry. That was your response, sir, that
the money is going to be recovered. That is beside the point.
It was against the law to take the money out, and one of the
top five regulators in the country said no harm, no foul.
I yield back, Mr. Chairman.
Mr. Wetjen. Congressman, that is not what I said. In fact,
there are enforcement actions under way to address what was
happening in the MF Global situation. I was simply pointing out
as far as any discrepancies at the staff levels between the
agencies, those were unfortunate. I am not aware of what those
discrepancies were. But the good news, the silver lining, if
you will, is the fact that the moneys will be recovered.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
I know we have covered this ground a little bit today, but
I do want to continue the discussion about how the Volcker Rule
as currently structured would have the serious potential to
disrupt the collateralized loan obligation market.
In particular, I am concerned about the impact that it
could have on banks, some community banks in my home State of
Kentucky. Obviously, these banks are looking for an attractive
risk adjusted return, but as you know, the final rule
arbitrarily converts AAA CLOs from debt securities into the
equivalent of equity, thereby making them ineligible to be held
by banks. It is estimated that banks would have to divest or
restructure up to $70 billion of CLO notes if the rule as
currently structured continues as a final unamended rule.
And I want to share with you just a comment from a
community bank, or part of a letter from a community bank to
you all as the regulators promulgating this rule. This is a
bank in my home State: ``We have invested $36.5 million in
senior CLO debt securities, and they constitute 14 percent of
our carefully managed investment portfolio. We view our
investment portfolio as a conservative and much less risky
component of our balance sheet.
``The final rule, if applied without clarification, could
have a material negative impact to our capital base, which we
have been trying to preserve after the losses incurred the past
4 years. It is hard to understand as a management team that was
able to take a financial institution through the darkest days
of the financial crisis why we should be presented with another
existential threat based solely on an arbitrary and expansive
interpretation of this final Volcker Rule. It would be tragic
if our efforts over the last 2 years were considerably set back
as a result of this final rule.''
And I would also note, I am concerned about the impact that
it could have on credit availability for American companies,
some in my district. Tempur-Pedic, which is a great company
that has an innovative mattress that it has been able to
provide to the American people, but, as you know, the CLOs
currently hold approximately $300 billion in commercial loans
to some of the most dynamic and job-producing companies in
America.
So it seems to me that the medicine that is being
prescribed here, banks forced to sell billions in CLO paper in
a fire-sale scenario and the loss of credit availability to
dynamic companies like Tempur-Pedic in my district would be far
more damaging to the credit markets than the perceived illness,
which is the hypothetical that banks would suffer some kind of
losses from holding AAA CLO paper. CLO paper, by the way,
performed very, very well during the financial crisis.
So I appreciate your testimony, Governor Tarullo, saying
that this is a priority in the interagency working group, that
you are going to reexamine this. I encourage you to do so on an
expedited basis. But I want to know why this is even an issue
to begin with, given the fact that the statutory language in
Dodd-Frank under Section 619 carves out the sale or
securitization of loans in market making.
And I am just reading from the statutory language:
``Nothing in this section shall be construed to limit or
restrict the ability of a banking entity or nonbank financial
company supervised by the board to sell or securitize loans in
a manner otherwise permitted by law.''
Why is this even authorized in Dodd-Frank?
Mr. Tarullo. The short answer, Congressman, is because some
of these CLOs don't have just loans in them that have been
collateralized and bundled together; they have other securities
as well.
Mr. Barr. Okay. So if--
Mr. Tarullo. If you have a pure CLO, it would not be a
covered fund.
Mr. Barr. Okay. So how do you reconcile that with the risk
retention rules under Section 941? You are characterizing CLOs
under that rule as debt, but under this rule you are
characterizing them as equity. Am I missing something?
Mr. Tarullo. No. Again, it is the presence of the other
securities, other than the collateralized loans. So that is why
I was saying earlier, there are two distinct issues here. One,
will the CLO market adjust going forward to include only loans
and to bundle them together, which would then come under the
exemption you just cited? They may not, in which case we have
to think about that, too. But as I earlier said, the legacy
issues are for the many CLOs that include things other than the
loans. And that is where, as I said, our process is going to
have to see whether we can find--
Mr. Barr. Ten seconds left, if I could. Could you give us a
timetable on when you might be able to fix this and also
whether the fix could be a grandfathering of existing CLO
investments so as not to create turmoil?
Mr. Tarullo. I can't answer either of those questions
precisely right now other than to tell you that this is the
first issue on the agenda.
Mr. Barr. We may be following up with you on that
timetable, because we do need a solution here.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
I thank the panel for taking time to be with us here today
for this very important hearing. You have been here with us for
a few hours. So thank you for taking time out of your busy
schedules.
Governor Tarullo, as you know, the Volcker Rule includes an
extended transition period designed to allow the preexisting
legacy private equity investments of banking entities to run
off naturally. These investments provide capital to small and
medium-sized businesses throughout the country.
However, as currently written, the rule effectively
prevents banks of any size from taking advantage of this runoff
period for existing investments in illiquid funds, which seems
contrary to the intent of the exemption. It also will force
banks to liquidate these investments at fire sale prices.
With that in mind, please tell me how you plan to address
these issues so regulated banks are not forced into taking
significant losses on the investments. When is the Federal
Reserve going to address the comments that it received
expressing concern with respect to this aspect of the
regulations?
Mr. Tarullo. So, Congressman, as I was discussing earlier
with some of your colleagues, the timing is in part for some
institutions driven by accounting rules where there has been
depreciation of the assets in question.
More generally, I think everyone on the panel knew that
there would be some divestiture required as a result of the
rule, and that is why the period was created. We will be
looking, as I indicated in an earlier answer, to see whether
the quantum of particularly covered funds that are going to be
divested in the conformance period are such as to raise these
kinds of risks of fire sales. That is the information we are
going to be gathering and that we will presumably be getting
from the firms.
As someone mentioned earlier, a number of firms,
particularly the larger firms, have already been divesting in
anticipation of the rule.
Mr. Rothfus. Yes. We will be following up with you on that
in writing. We are looking for a commitment that you would be
interested in fixing this issue as it goes forward.
We have spent the last 3 hours, more than the last 3 hours
talking about the Volcker Rule and the tremendous amount of
time that your respective agencies put into developing the
rule: 932 pages; 297,000 words.
Mr. Curry, Mr. Gruenberg, GAO's report regarding
proprietary trading notes, ``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 stand-alone 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 stand-alone proprietary
trading.''
Did any of the 450 banks that failed during the crisis fail
because of proprietary trading?
Mr. Gruenberg. On the failure issue, we have had actually
492 since 2008. I don't know that you can identify proprietary
trading as the cause of failure.
Just to shed light on the issue, I think the activity of
proprietary trading is really largely a function of the very
large institutions, and those were not the ones, frankly, among
the 492, and that may be part of the issue here.
But to directly answer the question, it is true, of the
institutions that failed, we wouldn't identify proprietary
trading as the cause, but I am not sure that is really the key
question here, because it is the concentration of the activity
among the larger institutions that I think is what would need
to be examined.
Mr. Rothfus. Again, but the Volcker Rule is aimed at
proprietary trading. And we went through the crisis, and not
one of these banks failed because of proprietary trading. Isn't
that true?
Mr. Gruenberg. Yes.
Mr. Rothfus. Yet we know that these institutions are still
going to be able to take positions in GSE paper, Fannie paper,
Freddie paper, municipal securities, as the chairman mentioned,
Detroit, Puerto Rico. Is it fair to say that at least with
respect to the Volcker Rule, the largest banks will still be
able to take risky bets backed by the taxpayers on these
exempted securities?
Mr. Curry. From a large bank supervision standpoint--I
think Governor Tarullo mentioned this earlier--we are going to
be looking at the issue even more broadly in terms of whether
their direct activities other than market making or
underwriting, things that occur inside the bank, that they are
done in a safe and sound manner, that there are appropriate
risk-management controls in place, which is a little bit
different than the approach with the Volcker Rule.
Mr. Rothfus. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The apparent last questioner is the gentleman from Ohio,
Mr. Stivers. He is now recognized for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
I would like to thank all of you for your patience and for
being willing to sit through tons and tons of questions. I have
a few questions. A lot of mine are follow-ups, because when you
go last, you get to follow up on a lot of other people's
questions.
I do want to make a quick plug for something that Mr.
Scott, Mr. Garrett, Mrs. Maloney, and Mr. Barr talked about on
CLOs. I do believe that including CLOs doesn't reflect
congressional intent and could have really disruptive and
avoidable impacts on businesses that use CLOs to obtain
financing and create jobs, and I would ask all the regulators
to take a serious look at whether the grandfathering that Mr.
Barr suggested or some other clarity for folks who already own
these CLOs.
We are changing the rules in the middle of the game.
Hopefully, you are all willing to take a look at that issue,
because I think it could have a major negative impact on jobs
and on a lot of these companies that have used these to finance
jobs. So I guess, raise your hand if you are willing to take a
serious look at those issues and grandfathering and whether
there are solutions. Thank you. I will take that as unanimous
agreement. I really appreciate that.
The first question I have is for Mr. Tarullo with regard to
private equity, and so this is kind of a follow-up on what Mr.
Rothfus just asked. But I am hearing a lot of concern around
the definition of illiquid funds from the Federal Reserve, that
a lot of folks believe that they won't be able to have access
to the 5-year extension that could be granted to them because
of the definition of illiquid funds. And I guess I am curious
if you would be willing to take a look at that and its impact
on the ability of folks to keep their capital or being forced
to sell at a fire sale.
Mr. Tarullo. Sure. I am happy to take any comments from
people raising issues about it.
Mr. Stivers. Have you considered or did you consider in the
Volcker Rule with regard to private equity investments made
prior to May of 2010, which is the cutoff date for the Volcker
Rule, allowing some kind of grandfathering even up to, say, 3
percent of Tier 1 capital? Was that even something that was
discussed or is it something that should be looked at?
Mr. Tarullo. I don't recall any discussion of that,
Congressman. I think that it was more of a decision as to when
to put a cutoff date that--
Mr. Stivers. I would just urge you--maybe there should have
been and maybe there still should be--so I would ask you to go
back and take a look at that and capping that. Even if you cap
it at some percent, these private equity investments have many
of the same criteria of the loans that these banks make, and
especially in the middle market, it is a big impact on a lot of
these companies.
My next question is for Ms. White. I want to shift a little
bit to the municipal advisory rule. It is my understanding that
the municipal advisory rule that was drafted was really
intended to cover unregistered municipal advisors. Was that
really the intent of that rule?
Ms. White. That was certainly the core.
Mr. Stivers. And so it troubles me that the way it is
written, it requires issuers to hire a municipal advisor for
every deal unless they do one of two things: put out an RFP; or
sign a letter of engagement with a broker-dealer.
I have the Ohio State University, which is partially in my
district, and partially in Mrs. Beatty's district. They are
pretty sophisticated. They don't want to have to hire a
municipal advisor for every action, and it just creates an
extra hassle for them and extra burdens and it forces them to
sign a letter of engagement when they are pretty sophisticated.
I guess I would ask you to take a look at that provision as
well.
Ms. White. Yes. And I think we recently, in January, put
out a number of answers to some questions, I am not sure about
that one, but we also recently stayed the effectiveness of the
registration to July 1st, and obviously we can consider any
other questions.
Mr. Stivers. I really appreciated that. And I have asked
Chairman Garrett to see if we could have a panel on that
subject sometime between now and May to help give you some
advice from us.
The last thing I wanted to talk about is--and I know this
has been hit on by many other people, Ms. Maloney and others--
so who here thinks, raise your hand if you think having one
lead regulator for issues like the Volcker Rule, where there
are five agencies collaborating, makes sense. Does anyone think
it makes sense to have a lead, at least one lead?
Okay. If you don't think it makes sense, could we go down
the line and each one of you tell me how we deal with conflicts
where you have different interpretations of the same rule,
because unless you have one person in charge--I am a military
guy--nobody is in charge. So I would love to hear how you think
we should deal with conflicts.
Mr. Tarullo. Congressman, I think this is the statutory
scheme that we have been given, not just with respect to
Volcker, but more generally. That is, we each have independent
responsibility, we all try to be cooperative and accommodating
to one another. But again, I don't think anybody is in a
position to cede and say that Chair White is the ultimate
decision maker of things that go on in national banks. It is an
artifact of the system that has advantages, but it is also has
some disadvantages.
Chairman Hensarling. Fortunately for the panel, the time of
the gentleman, and of all of the ladies and gentlemen, has
expired. The Chair, though, does want to follow up with one
request. The gentleman from New Jersey, Mr. Garrett, had made a
request. Clearly, you have noticed a lot of concern about
liquidity in the corporate bond market within this hearing.
And, in fact, Chair White, I think your Division of Investment
Management has also echoed a concern.
The request was made by Chairman Garrett that your working
group report on the status of liquidity in the corporate bond
market on at least a quarterly basis. I don't think I gave him
an opportunity to receive an answer from you, but I want to
repeat that request. I would love an oral answer of yes, no, or
maybe.
Governor Tarullo?
Mr. Tarullo. Maybe. And we will give it to you in writing,
Mr. Chairman, you and Chairman Garrett.
Chairman Hensarling. Starting out with one ``maybe.'' Just
for the benefit of the panel, if we don't hear ``yes,'' I can
guarantee you that you will get another invitation to testify
before the committee in the next quarter. Maybe that will help
color your answer, Chair White.
Ms. White. It doesn't really change my answer. We will
discuss it and get back to you.
Chairman Hensarling. I'm sorry?
Ms. White. I said we will take it up--
Chairman Hensarling. Okay. So that is two ``maybes.'' You
can be a trendsetter here, Mr. Curry.
Mr. Curry. I think I am a ``maybe.''
Chairman Hensarling. Three ``maybes.''
Mr. Gruenberg. We need to look at it and get back to you.
Chairman Hensarling. Four ``maybes.''
Mr. Wetjen. I think the only thing I would add is I think
probably the whole group would like to get to something in
terms of what is being requested, but we just have to work
through whatever obstacles there might be.
Chairman Hensarling. You will get a formal request to get
this information to the committee on a quarterly basis if it is
not forthcoming. It is something terribly important. We will
have another hearing within the next quarter.
But I do want to thank all of the witnesses for your
testimony today, and I want to thank you for your patience.
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 1:31 p.m., the hearing was adjourned.]
A P P E N D I X
February 5, 2014
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