[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




 
                      EXAMINING THE IMPACT OF THE


                      VOLCKER RULE ON THE MARKETS,


                         BUSINESSES, INVESTORS,


                            AND JOB CREATORS

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,
                       SECURITIES, AND INVESTMENT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 29, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-12
                           
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                         




                  U.S. GOVERNMENT PUBLISHING OFFICE
                   
 27-369 PDF              WASHINGTON : 2018       
____________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
  Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001                                
                           
                           
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
      Subcommittee on Capital Markets, Securities, and Investment

                   BILL HUIZENGA, Michigan, Chairman

RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 29, 2017...............................................     1
Appendix:
    March 29, 2017...............................................    41

                               WITNESSES
                       Wednesday, March 29, 2017

Blass, David W., General Counsel, Investment Company Institute...     5
Jarsulic, Marc, Vice President, Economic Policy, Center for 
  American Progress..............................................     7
Kruszewski, Ronald J., Chairman and Chief Executive Officer, 
  Stifel Financial Corporation, on behalf of the Securities and 
  Financial Markets Association (SIFMA)..........................     9
Quaadman, Thomas, Executive Vice President, Center for Capital 
  Markets Competitiveness, U.S. Chamber of Commerce..............    11
Whitehead, Charles K., Myron C. Taylor Alumni Professor of 
  Business Law, and Director, Law, Technology, and 
  Entrepreneurship Program, Cornell University...................    13

                                APPENDIX

Prepared statements:
    Blass, David W...............................................    42
    Jarsulic, Marc...............................................    56
    Kruszewski, Ronald J.........................................    65
    Quaadman, Thomas.............................................    79
    Whitehead, Charles K.........................................   198

              Additional Material Submitted for the Record

Huizenga, Hon. Bill:
    Written statement of the National Venture Capital Association   216
    Slides used during the hearing by Republican Members.........   218
    Written responses to questions for the record submitted to 
      Ronald J. Kruszewski.......................................   220
Ellison, Hon. Keith:
    Written responses to questions for the record submitted to 
      Marc Jarsulic..............................................   223
Maloney, Hon. Carolyn:
    Letter to Fed Chair Janet L. Yellen, FDIC Chair Martin J. 
      Gruenberg, CFTC Chair Timothy Massad, Comptroller of the 
      Currency Thomas J. Curry, and SEC Chair Mary Jo White, 
      dated August 29, 2016......................................   227


                      EXAMINING THE IMPACT OF THE



                      VOLCKER RULE ON THE MARKETS,



                         BUSINESSES, INVESTORS,



                            AND JOB CREATORS

                              ----------                              


                       Wednesday, March 29, 2017

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                        Securities, and Investment,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Members present: Representatives Huizenga, Hultgren, 
Stivers, Wagner, Messer, Poliquin, Hill, Emmer, MacArthur, 
Davidson, Hollingsworth; Maloney, Sherman, Lynch, Scott, Himes, 
Foster, Sinema, Vargas, and Gottheimer.
    Ex officio present: Representative Hensarling.
    Chairman Huizenga. The Subcommittee on Capital Markets, 
Securities, and Investment will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Today's hearing is entitled, ``Examining the Impact of the 
Volcker Rule on the Markets, Businesses, Investors, and Job 
Creation.''
    I now recognize myself for 3 minutes to give an opening 
statement.
    This hearing will examine the impact of the Volcker Rule on 
the U.S. capital markets broadly, including its impact, most 
especially, on the liquidity and functionality of the fixed 
income and securitization markets, the ability of U.S. and 
international businesses to finance their operations, and U.S. 
competitiveness and job creation.
    The Volcker Rule, or Section 619 of the Dodd-Frank Act, 
prohibits U.S. bank holding companies and their affiliates from 
engaging in ``proprietary trading'' and from sponsoring hedge 
funds and private equity funds.
    Because of the key role that market making plays in 
ensuring deep, liquid, capital markets, the framers of the 
Volcker Rule sought to exempt market-making activities from the 
coverage of its prohibition on proprietary trading.
    There is just one problem. The line between impermissible 
proprietary trading and permissible market making is virtually 
impossible to draw. As a result, banks are getting out of the 
market- making business for fear of running afoul of the 
Volcker Rule. This is a great detriment to the U.S. capital 
markets, in my opinion.
    The real world implications of the Volcker Rule have been 
higher borrowing costs for job creators, smaller investment 
returns for hard-working families, and less economic activity 
overall because of further regulatory restraints placed on 
already reduced liquidity margins in key fixed income markets, 
including the corporate bond market.
    Recently, both current and former regulators have finally 
conceded that the Volcker Rule is impacting the liquidity of 
corporate debt. Specifically, in December of 2016, staff at the 
Federal Reserve issued a report concluding that, ``The 
illiquidity of stressed bonds has increased after the Volcker 
Rule.''
    Furthermore, former Federal Reserve Board Governor Jeremy 
Stein, who served during the Obama Administration, recently 
published a paper with his fellow Harvard colleagues, and 
concluded that the Volcker Rule should be repealed.
    They note that the Volcker Rule also discourages broker-
dealer banks from providing liquidity during a market 
correction, and that the Rule creates a significant increase in 
compliance and supervisory costs.
    Market making is crucial to the modern financial system, in 
which companies raise funds by selling equity, bonds, notes, 
and commercial paper.
    Market makers also hold down the cost of credit for 
consumers. Credit card debt and mortgages are often financed by 
being bundled into securities, which are then bought and sold 
in the capital markets. By acting as a market maker for these 
kinds of securities, banks make it cheaper and easier for 
responsible consumers to use their credit cards and obtain 
mortgages.
    From its inception, the Volcker Rule has been a solution in 
search of a problem. It seeks to address activities that had 
nothing, absolutely nothing to do with the financial crisis, 
and its practical effect has been to undermine financial 
stability, rather than to preserve it.
    Hard-working Americans, whether they realize it or not, 
rely on capital markets to save for everything from college to 
retirement. And as their Representatives, we must act to 
eliminate burdensome and unnecessary regulations such as the 
Volcker Rule, to ensure that U.S. capital markets remain the 
deepest and most liquid of all investment so that all investors 
receive the greatest return on their investment. I look forward 
to hearing from our witnesses today.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentlelady from New York, Mrs. Maloney, for 5 
minutes for an opening statement.
    Mrs. Maloney. Thank you. Thank you, Mr. Chairman, for 
calling this very important hearing, and for all of our 
presenters here today. It is a very, very important topic.
    I strongly support the Volcker Rule, and I believe it 
stands for an important principle, that banks should not gamble 
with their customers' money, especially when that money is 
backed by a taxpayer guarantee. We have seen too often in the 
past how that produces a situation where all the profit is 
privately shared, while the risk is borne by the public.
    The Volcker Rule, which was named after a great New Yorker, 
former Fed Chair Paul Volcker, came into effect in July 2015. 
So this is a good time to take stock of how this rule is doing. 
Today I have some data from the Federal Reserve that will shed 
light on how the implementation of the Volcker Rule is going.
    Under the Rule, banks are required to report a series of 
quantitative trading metrics, in other words hard data, to the 
regulators, such as risk levels on each trading desk in order 
to help the regulators identify any prohibited proprietary 
trading or trading for your own account.
    Last August, I sent a letter to five agencies in charge of 
the Volcker Rule, requesting that they provide me with an 
analysis of these trading metrics which they have been 
collecting from the banks since July 2014, over 2\1/2\ years. 
And I ask unanimous consent to place that letter into the 
record.
    Chairman Huizenga. Without objection, it is so ordered.
    Mrs. Maloney. The Federal Reserve has been very helpful 
with my request and has provided me with an analysis of some of 
the data that they collect, so this data is limited to the data 
that the Fed collects. It does not represent any other agency's 
data.
    And I want to share this data with everyone today because I 
think it is important. It is the first hard data we have on the 
Volcker Rule. It is complicated, but it is extremely important.
    As you can see on the screen, the first two charts show 
that risk levels on banks' trading desks have been largely 
steady since the Volcker Rule took effect. All of these big 
downward spikes in the chart represent holidays, like 
Thanksgiving or Christmas, when most markets are closed. So 
this is not something to worry about.
    Importantly, these charts cover two periods of market 
stress. First, the Third Avenue Credit Fund's suspension of 
withdrawals in December of 2015. A headline in Bloomberg back 
then read, ``Third Avenue Redemption Freeze Sends Chill Through 
Credit Market.''
    And second, the China growth scare, when China's economic 
growth suddenly slowed down in January and February of 2016. A 
headline in Forbes at that time asked, ``Should Markets be 
Scared?''
    The charts show that the banks did not pull back from the 
markets during these two periods. In fact, they increased their 
exposure during these episodes.
    Next, we have a very interesting table that shows the so-
called Sharpe ratios on banks' trading desks, broken out by 
asset class. What this table suggests is that banks are now 
making the vast majority of their money on trading desks from 
legitimate market-making activities, which the Volcker Rule 
allows, and not from inappropriate proprietary trading.
    The Sharpe ratio is a widely-accepted way of measuring 
risk-adjusted returns for banks. In other words, it measures 
the returns that the banks' trading desks are getting on these 
asset classes relative to the amount of risk they are taking, 
which is important, because you can always get higher returns 
by taking more risks.
    So we need a way to adjust for the risk level so we can 
compare performance. The higher the Sharpe ratio, the better 
the returns relative to the risk.
    Now, the most interesting thing is the difference between 
the Sharpe ratios for new positions, existing positions, and 
changes in risk factors. If banks were still doing a great deal 
of proprietary trading, then they would be getting a lot of 
their returns from existing positions, or possibly from changes 
in risk factors.
    In other words, if banks were making proprietary bets that 
the price of a particular security would increase, then they 
would be getting most of their returns from price appreciation 
for securities they already bought, which are existing 
positions in this table.
    But as you can see, the Sharpe ratios for existing 
positions, as well as for changes in risk factors, have 
averages very close to zero. This suggests that banks are not 
engaging in any amount of proprietary trading.
    Instead, the table shows that the banks are mostly 
profiting from new positions. This suggests that trading desks 
at banks are making most of their money by acting as legitimate 
market makers, which is exactly what Congress intended to 
happen under the Volcker Rule.
    In other words, most of the banks' profits are coming from 
the fees, also known as the spread, that banks collect on 
trades they do with their customers. These fees are collected 
up-front, which is why most of the banks' profits are coming 
from new positions.
    So I wanted to share this data with everyone here today 
because I think it is relevant to this hearing. It is important 
that we look at hard data, the facts on the Volcker Rule. And 
based on this data, I would say the Volcker Rule is working.
    I look forward to your testimony.
    Chairman Huizenga. The gentlelady's time has expired.
    I now recognize the vice chairman of the subcommittee, Mr. 
Hultgren from Illinois, for 2 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. And thank you all 
for being here. It is not a surprise that Congress needs to 
review one of the most debated provisions of the Dodd-Frank Act 
just a few years after it was implemented.
    Unfortunately, the Dodd-Frank Act and the Volcker Rule were 
sold to the American people as a way of protecting taxpayers 
and investors, when in fact they are doing, I would say, just 
the opposite.
    There were mixed feelings among Republicans and Democrats 
when the Volcker Rule was debated in Congress and this was 
probably because policymakers understood proprietary trading 
did not cause the financial crisis and that there would be 
real, practical issues for implementing the proposed 
restrictions on proprietary trading.
    In fact, Treasury Secretary Geithner, who was appointed by 
President Obama, has said, if you look at the crisis, most of 
the losses that were material for both the weak and strong 
institutions, did not come from those activities.
    The realities were so hard for Congress to address that a 
10-page bill became a 932-page regulation with confusing and 
conflicting perspectives from multiple regulators.
    And let us not forget, this does not just apply to our 
largest financial institutions. Compliance burdens also trickle 
down to community banks that have to prove to regulators what 
is already known; they were almost never engaged in activities 
covered by the Rule.
    It is impossible to measure if the Volcker Rule is making 
our markets safer, but we know it is hurting liquidity. The 
lack of clarity around the market making as collusion is of the 
most significant concern. Dealers must have flexibility to hold 
inventory and provide liquidity, especially during times of 
market stress.
    A December 2016 working paper from the Federal Reserve 
staff on the Volcker Rule concluded, ``We find that the net 
effect is a less liquid corporate bond market.''
    This damage to liquidity drives up costs in our fixed 
income markets, makes it more difficult for companies to grow 
and create jobs, drives down returns for investors, and 
increases the potential for market shocks. All of this is very 
concerning.
    I look forward to the testimony today, and I yield back.
    Chairman Huizenga. The gentleman yields back.
    Today, we welcome the testimony of a distinguished panel. 
First, we have Mr. David Blass, the general counsel of the 
Investment Company Institute (ICI).
    Second, we have Mr. Marc Jarsulic, the vice president of 
economic policy at the Center for American Progress.
    Third, we have Mr. Ronald Kruszewski, the chairman and 
chief executive officer of Stifel Financial Corporation, who is 
testifying on behalf of SIFMA.
    Fourth, we have Mr. Thomas Quaadman, the vice president of 
the Center for Capital Markets Competitiveness at the U.S. 
Chamber of Commerce.
    And finally, we have Dr. Charles Whitehead, a business law 
professor from Cornell University.
    Gentlemen, thank you very much for being here. We 
appreciate your time, and you will each be recognized for 5 
minutes to give an oral presentation of your testimony. And 
without objection, each of your written statements will be made 
a part of the record.
    Mr. Blass, you have 5 minutes.

   STATEMENT OF DAVID W. BLASS, GENERAL COUNSEL, INVESTMENT 
                       COMPANY INSTITUTE

    Mr. Blass. Chairman Huizenga, Ranking Member Maloney, and 
members of the subcommittee, thank you very much for the 
opportunity to testify today.
    My name is David Blass. I am the general counsel of the 
Investment Company Institute. Our members are mutual funds, 
exchange traded funds, and other registered funds with the SEC.
    We have a very unique perspective on the Volcker Rule 
because our members are funds that are both investment vehicles 
that might be subject to the Volcker Rule, and they are 
investors in the capital markets that themselves are affected 
by the Rule.
    We applaud this subcommittee for reviewing the impact of 
the Volcker Rule on the capital markets, on businesses, 
investors, and job creators. We support appropriately tailored 
regulation that ensures a vibrant, resilient financial system. 
And we support revisiting the Rule to determine whether it is, 
in fact, so appropriately tailored.
    Based on our review, regretfully, we conclude that it is 
not. By all acknowledgements, the Volcker Rule never was meant 
to apply to ordinary stock and bond mutual funds, ETFs and 
other investment funds registered under the Investment Company 
Act of 1940. And there is a good reason for that.
    The Investment Company Act already provides a very 
comprehensive framework of regulation that serves both to 
protect investors and to mitigate risk to the financial system, 
including the very kinds of risks that are at the very heart of 
the policy rationale for the Volcker Rule.
    Registered funds are transparent. They are not highly 
leveraged. Their assets are held in separate custody by bank 
custodians, and transactions with affiliates are either 
outright prohibited or are highly restricted. And boards of 
directors, typically with a majority of independent boards of 
directors, oversee these funds.
    But registered funds and their advisors have been left to 
sort through the many consequences of the Volcker Rule and its 
impact on the capital markets, and I would like to highlight 
three of those for you today.
    First, the final regulation failed to provide a full carve-
out for registered funds. As a result, many of these funds find 
themselves coming within the definition of a banking entity.
    This could happen in the case of a newly-launched mutual 
fund, for example, whose investment advisor is affiliated with 
a bank. Solely by reason of the advisor's investment of start-
up capital, referred to as seed money, the new fund itself 
could be subject to the Volcker Rule's trading and investment 
restrictions as if the fund were a bank, and it is not.
    The effect is to place new restrictions on longstanding, 
very commonplace practices that, to the best of our knowledge, 
have never raised any regulatory concerns. It is clear to us 
that Congress never intended this result.
    Now, the agencies charged with implementing the Volcker 
Rule ultimately issued some much-needed guidance very shortly 
before the compliance date. But the 3 years it took the 
agencies to issue that guidance exposes just how cumbersome and 
clunky this rule is to administer.
    And to further compound the problem, that guidance wasn't 
issued through a transparent rulemaking process, but rather, 
through informal agency guidance, which presumably could be 
changed at the whim of the agency's staff.
    Second, the final regulations create competitive 
inequalities. And I will give you one example. They exclude 
from the Volcker Rule's restrictions foreign public funds. That 
is an entirely appropriate exclusion.
    The problem is some U.S. firms and their affiliates also 
rely on this exclusion, and the agencies administering the 
Volcker Rule placed onerous restrictions on those U.S. firms 
and their affiliates. They didn't apply the same restrictions 
for non-U.S. firms, placing U.S. firms at a competitive 
imbalance.
    Third, the Volcker Rule is overly broad and insufficiently 
tailored to its policy objectives. Regulations that sweep too 
broadly introduce friction that influences how important market 
participants, dealers in this case, access the capital markets 
and provide liquidity.
    The Volcker Rule's implementing regulations are 
extraordinarily complex, and they are built upon a presumption 
that all short-term principal trading is ``proprietary 
trading.'' And to overcome this presumption, a banking entity 
has to be able to demonstrate that it qualifies for an 
exemption, and in most cases that is the market making 
exemption, but that is a very high bar, and it puts the banking 
entity at risk of second-guessing.
    Now, many variables affect capital markets activity and the 
liquidity in those markets. Clearly, however, the kind of 
friction created by the overly broad and ambiguous regulations 
included in the Volcker Rule can and does influence the ways in 
which many market participants, dealers and other trading 
partners, including funds, participate in those capital 
markets.
    And for these reasons, among many others, we strongly 
support the committee's examination of the Volcker Rule and its 
consideration of the capital markets more broadly.
    Thank you very much for your attention this morning. I 
would be happy to answer any questions.
    [The prepared statement of Mr. Blass can be found on page 
42 of the appendix.]
    Chairman Huizenga. The gentleman yields back.
    Now, we go to Mr. Marc Jarsulic, vice president, Center for 
American Progress. You have 5 minutes, sir.

 STATEMENT OF MARC JARSULIC, VICE PRESIDENT, ECONOMIC POLICY, 
                  CENTER FOR AMERICAN PROGRESS

    Mr. Jarsulic. Thank you, Mr. Chairman, Ranking Member 
Maloney, and members of the subcommittee for the opportunity to 
testify on this important topic.
    I am Marc Jarsulic, the vice president for Economic Policy 
at the Center for American Progress. And today I will attempt 
to outline the importance of the Volcker Rule and to highlight 
the evidence that the Volcker Rule has not caused the 
deterioration in liquidity in the corporate bond market.
    First to the purpose of the Rule. The Volcker Rule was 
intended to do something very reasonable: to prevent bank 
holding companies and their subsidiaries from engaging in 
proprietary trading and speculative fund, hedge fund, and 
private equity investments.
    These activities are capable of generating high levels of 
risk and large losses, which can damage the balance sheets of 
even very large banks.
    The $6 billion lost by JPMorgan Chase in the 2012 London 
Whale incident, which involved proprietary trading-type 
activities, is illustrative of the risks that can be generated. 
We also know from historical experience that with many 
important financial institutions engaged in excessive risk-
taking, taxpayers can be left bearing the burden when their 
bets go bad.
    During the financial crisis, large amounts of risks were 
shifted onto U.S. taxpayers, as the risks taken by large bank 
holding companies and other important financial market actors 
generated substantial losses.
    Because those losses threatened asset fire sales and 
widespread panic, the Federal Reserve, the FDIC, and Treasury 
were forced to step in to support asset prices and the 
institutions that were threatened with ruinous loss. Trillions 
of dollars of taxpayer funds were put at risk to stabilize the 
financial sector.
    Now, let me make a few remarks about the effects of the 
Volcker Rule. I think there is little question that the post-
crisis behavior of securities dealers collectively has changed 
significantly compared to the pre-crisis period.
    The total assets of securities brokers and dealers have 
declined from peak values of about $5 trillion in 2008 to about 
$3.5 trillion in 2016, and corporate bond holdings have fallen 
in a similar pattern.
    The decline in corporate inventories is attributed to the 
Volcker Rule and to other regulatory changes sometimes. 
However, the connection between the decline in bond inventories 
and the Volcker Rule is really not that strong.
    As analysts for Goldman Sachs have pointed out, the very 
large run-up in corporate and bond inventories pre-crisis 
reflects the accumulation of positions in private labeled, 
mortgage-backed securities, rather than in traditional 
corporate bonds.
    And they estimate that the declining issuance of those 
bonds and declining prices explain the decline in dealer 
inventories from their peak levels in 2007 to 2012.
    Moreover, while critics of the Volcker Rule have long 
forecast dire consequences for the corporate bond market, 
including declining liquidity and harm to the functioning of 
the capital markets, these negative effects have not 
materialized.
    Liquidity, which is usually thought of as the cost of 
quickly converting an asset into cash, is typically measured by 
a range of indicators, which include the desk spread, the price 
impact, and trade size.
    Data on these indicators do not show deterioration of 
corporate bond liquidity. The desk spread in the corporate bond 
market for both investment grade and high yield bonds has 
declined since hitting a peak in the financial crisis. It is 
now lower than in the pre-crisis period.
    A standard measure of price impact has declined for both 
investment-grade and high-yield bonds since the crisis, and is 
now very low relative to pre-crisis levels.
    Trade size has declined during the financial crisis and has 
not yet recovered to pre-crisis levels. And while by itself 
this might be taken as a measure of decreased liquidities, the 
declines in price impact are inconsistent with this 
explanation.
    Finally, the forecasted harm to corporate access to capital 
has also failed to appear. New issues of corporate bonds are at 
record levels, at or above the $1 trillion per year, for the 
period 2010 to 2015.
    In conclusion, it seems fair to say that the exit of large 
banks from proprietary trading has not had a measurable effect 
on corporate bond market liquidity, liquidity risk, or the 
ability of corporations to raise funds in the capital market.
    With respect to these criteria, our bond markets are 
functioning at least as well, if not better than, they were in 
the pre-crisis period. It is important to remember, however, 
that there is no reason to expect market makers, or any other 
financial market participants, to act as shock absorbers in 
times of extreme stress.
    Market makers will buy assets if they expect to profit from 
their purchases, but in a highly uncertain environment, they 
will not step in to catch a falling knife and cushion large 
price declines. If we want to avoid the problems generated by 
asset bubbles and the crashes that follow them, we need to take 
preventative measures.
    The Dodd-Frank Act, which requires banks and non-banks to 
put more equity on the line when they engage in asset 
purchases, raises equity requirements when assets are funded 
with short-term runnable credit; requires the balance sheets of 
banks to include sufficient liquidity to deal with asset shock, 
price shocks; gets banks out of the business of proprietary 
trading; and provides needed protections.
    Demolition of these preventative measures is likely to be a 
very costly exercise in historical amnesia. Thank you.
    [The prepared statement of Mr. Jarsulic can be found on 
page 56 of the appendix.]
    Chairman Huizenga. The gentleman's time has expired.
    Mr. Kruszewski, thank you for being here today, and you 
have 5 minutes.

STATEMENT OF RONALD J. KRUSZEWSKI, CHAIRMAN AND CHIEF EXECUTIVE 
    OFFICER, STIFEL FINANCIAL CORPORATION, ON BEHALF OF THE 
      SECURITIES AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Kruszewski. Chairman Huizenga and Ranking Member 
Maloney, thank you for the opportunity to testify on behalf of 
SIFMA, and as chairman and chief executive officer of Stifel 
Financial Corporation.
    Stifel is headquartered in St. Louis, Missouri, and we own 
an investment bank and a federally-insured depository. Stifel 
employs over 7,000 people, has $20 billion in assets, and 
manages approximately $240 billion for our clients.
    To start, I am not a proponent of the Volcker Rule. I 
believe it provides little benefit regarding its stated purpose 
to reduce systemic risk. However, I have the upmost respect for 
Mr. Volcker, and to be clear, my criticism of the Rule is not a 
criticism of him. I remember all too well the accomplishments 
of Mr. Volcker as Fed Chairman in fighting the rampant 
inflation of the 1980s.
    Let me begin with my conclusion: It is my personal view 
that the Volcker Rule needs to be repealed. If not repealed, it 
must be materially amended to avoid further damage to the 
markets my company serves. Why be so bold? It is simple cost-
benefit analysis.
    Stifel serves small and middle market companies and the 
investors in those same companies. We, therefore, have a front 
row seat to comment on the impact of Volcker on these 
companies.
    Make no mistake, I do not believe deposit-taking banks 
should be making risky short-term speculative bets. And, in 
fact, the law has long prohibited such activity.
    But I believe the way to regulate risk, systemic or 
otherwise, is not by inhibiting trading or traditional market 
making, which provides liquidity and depth to our capital 
markets, but rather through capital and liquidity rules.
    The financial crisis was rooted in the loan book, not the 
trading book. Paul Volcker himself, in a speech in 2010, 
acknowledged that proprietary trading did not cause the 
financial crisis or contribute to the failure of a bank.
    The Volcker Rule is beyond complex, covering over 950 pages 
and 2,800 footnotes. You need a team of law firms, not just 
lawyers, to be able to decipher this.
    The Rule includes a provision called Reasonably Expected 
Near Term Demand (RENTD), a concept only Government could 
devise. RENTD limits market making so it does not exceed the 
reasonably expected near term demand of clients, customers, and 
counterparties.
    Seven years after the enactment of Dodd-Frank, I am no 
closer to understanding what that term means or how to 
implement something so amorphous. Compliance with Volcker is 
governed by five separate agencies. That is five separate 
agencies. This fact alone supports a full repeal of this rule.
    In addition, the covered funds provisions of the Volcker 
Rule reached far beyond the intended focus on the use of hedge 
funds and private equity to facilitate indirect, impermissible 
proprietary trading. The provisions are highly technical and 
not focused on the actual activities of the entities that are 
captured.
    But what about the cost side of this equation? The Volcker 
Rule makes our capital markets less liquid, which increases the 
cost of capital for Stifel's clients, especially smaller 
companies which are major contributors to job creation.
    Stifel helps our clients by assisting them in raising 
capital from both the equity and debt markets. As part of this 
equation, Stifel commits to make markets, which benefits both 
the issuing company and the purchaser of the equity or the 
debt.
    Volcker materially impacts our ability to effectively make 
markets. This in turns causes the buy side to require higher 
compensation, reflected in lower equity valuations or higher 
interest rates. Investors now demand a significant liquidity 
premium for bonds issued by smaller firms.
    Because it is difficult to raise capital, small firms 
increasingly are finding it difficult to compete with larger 
firms. Instead, they are selling themselves to their larger 
competitors. In fact, a lot of the corporate bond issuance is 
from large firms financing the acquisitions of small firms, the 
highest share in 15 years.
    As a result, the economy is likely to see less job 
creation, less competition, less research and development in 
CAPEX, and frankly, less vitality overall.
    As I stated, I personally believe the Volcker Rule should 
be repealed. If not repealed, at a minimum, the Volcker Rule 
should be modified to: first, reverse language that assumes 
that all trades are proprietary unless proven otherwise; and 
second, eliminate the RENTD requirement.
    Prominent policymakers have also raised concern with how 
the Volcker Rule is working in practice. As noted, former Fed 
Governor Jeremy Stein co-authored a recent article which 
stated, ``The Rule may dissuade dealers from providing 
liquidity during a market correction.''
    The article further stated that it is difficult to enforce, 
while at the same time creating large compliance and 
supervisory costs. On balance, we believe the Rule should be 
repealed. Recent Fed staff reports say that the Volcker Rule 
has a deleterious effect on corporate bond liquidity.
    Federal Reserve Governor Jay Powell urged Congress to 
rewrite the Volcker Rule, stating in part that what the current 
law and Rule do is effectively force you to look into the mind 
and the heart of every trader to see what their intent is.
    We should not be debating whether or not banks should get 
relief from Volcker. Instead, we should be debating whether our 
economy benefits from this Rule. From my vantage point, based 
on the clients I serve, it does not. Thank you. I look forward 
to your questions.
    [The prepared statement of Mr. Kruszewski can be found on 
page 65 of the appendix.]
    Chairman Huizenga. Thank you for your input.
    Mr. Quaadman, you are recognized for 5 minutes.

STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER 
 FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Mr. Chairman, Ranking Member 
Maloney, and members of the subcommittee. Thank you again for 
holding this hearing and for the subcommittee's continued focus 
on the Volcker Rule, as well as issues impacting the ability of 
businesses to raise capital.
    The Chamber first started raising concerns with the Volcker 
Rule when President Obama introduced it in February 2010. We 
were concerned that the Volcker Rule would make it difficult to 
delineate market making and underwriting from proprietary 
trading.
    The Justice Potter Stewart Rule of, ``you know it when you 
see it,'' does not lend to clarity or for the certainty needed 
for businesses to raise capital or for markets to be efficient.
    We were also concerned that it would lead to complex 
regulation, and it would have a chilling effect on businesses' 
ability to raise capital. Instead, while understanding the 
intent of the Volcker Rule, the Chamber proposed a pro-growth 
alternative for those firms that would engage in proprietary 
trading higher capital standards.
    Instead, today we have both. We have a complex Volcker 
Rule, and higher capital standards that have their own OECD 
regulatory regime. Additionally, the Volcker Rule is the poster 
child of why good economic analysis is necessary for 
rulemaking. No economic analysis was performed or shared with 
the public while regulators were considering the Volcker Rule.
    The OCC belatedly, 4 months after the Rule was finalized in 
December 2013, issued an economic analysis that also did not 
look at the impacts of the Volcker Rule upon consumers, the 
consumers of banks, or the broader economy.
    The irony is that the Volcker Rule, which is designed to 
limit the impacts of proprietary trading on depository 
institutions, where the banking regulators were required under 
the Riegle Act to do an economic analysis to understand what 
the impacts were on depositary institutions and their 
consumers; yet, it was not done.
    In 2012, we had a study done by Professor Anjan Thakor of 
Washington University to list out what the business concerns 
and issues were with the Volcker Rule. And unfortunately, those 
are coming to fruition: bond markets are stressed with less 
liquidity; we have fewer market makers; and we have poor 
execution and diminished price discovery.
    The Federal Reserve-authorized study that we have talked 
about today finds that corporate bond markets' stress is 
attributable to the Volcker Rule. Additionally, we have seen 
increases in cash reserves by corporations, 50 percent in the 
S&P 500 since Dodd-Frank was passed in 2010, and over $100 
billion just in the first year of the Volcker Rule.
    The one thing that the Volcker Rule, as well as other 
regulations, has done, is increasingly forced corporations to 
use U.S. Treasuries as the sole means of cash management, which 
is increasing risk.
    If doctors were to prescribe a series of strong drugs and 
not check on drug interactions, they would be sued for 
malpractice. The Volcker Rule doesn't exist in a vacuum. And we 
have to look at it in conjunction with the Basel III 
implementation rules, the SIFI rules, risk retention rules, 
money market funds, and the like.
    All of those combine in one place, and that is the 
corporate treasurer's desk. Our 2016 treasurer survey, which 
interviewed over 300 treasurers, found that 79 percent of 
treasurers felt that financial regulations were adversely 
impacting their business' ability to raise capital, that 
current and pending regulations were making cash and liquidity 
operations more challenging, and \1/3\ of treasurers were 
forced to take unexpected actions because of regulations.
    Businesses are now passing higher costs on to consumers. 
One-third of treasurers see the situation worsening over the 
next 3 years if things do not change. And what has changed 
since 2013 is that businesses are dramatically using less banks 
in order to perform their financing functions.
    The Chamber supports the repeal of the Volcker Rule. But in 
the alternative, we will make four recommendations: one, that 
the regulators perform an economic analysis to the Volcker Rule 
and to also determine its impacts on bank customers in the 
broader economy; two, a cumulative impact analysis to the 
Volcker Rule and other regulations with the same accord. three, 
for the regulators to report back to Congress on findings and 
then anticipate a plan of action to address these failures; and 
lastly, the Congress should require banking regulators to do an 
economic analysis when writing rules subject to public review 
and comment, as other agencies do throughout the Government.
    Thank you, Mr. Chairman. I am happy to answer any questions 
you have.
    [The prepared statement of Mr. Quaadman can be found on 
page 79 of the appendix.]
    Chairman Huizenga. Thank you very much.
    And last, but certainly not least, Mr. Whitehead, you are 
recognized for 5 minutes.

   STATEMENT OF CHARLES K. WHITEHEAD, MYRON C. TAYLOR ALUMNI 
 PROFESSOR OF BUSINESS LAW, AND DIRECTOR, LAW, TECHNOLOGY, AND 
          ENTREPRENEURSHIP PROGRAM, CORNELL UNIVERSITY

    Mr. Whitehead. Thank you very much, Mr. Chairman, Ranking 
Member Maloney, and members of the subcommittee. Thank you for 
inviting me to testify today regarding the impact of the 
Volcker Rule on the financial markets and the general economy.
    My name is Charles Whitehead, and I am a professor at 
Cornell University. Before becoming an academic, however, I 
spent 17 years in the private sector and held senior legal and 
business positions in the financial services industry in New 
York and Tokyo.
    I testify today in favor of repealing the Volcker Rule. A 
principal goal of the Volcker Rule is minimizing risky trading 
activities by banks and their affiliates and consequently 
enabling banks to pursue a traditional banking business in 
providing capital to businesses and consumers.
    What the Rule fails to reflect is change in how credit is 
provided today, moving from traditional banking to increasing 
participation by banks in the capital markets. This necessarily 
involves the banks' use of their own balance sheets to buy and 
sell securities as part of a market making function. 
Artificially constraining their ability to do so affects the 
smooth operation of the capital markets.
    Now, there is certainly an argument for regulating risky 
trading activities. But as you have heard today, the Volcker 
Rule addresses the wrong problem in the wrong way.
    The Volcker Rule was sold to Congress as a response to the 
2008 financial crisis, an attempt to reduce risk in banks, 
principally by banning short-term proprietary trading directly 
by banks and their affiliates and indirectly through 
investments and hedge funds and private equity funds.
    But why was restricting short-term proprietary trading a 
solution to the crisis? The answer is far from apparent and is 
unsupported by the facts that Congress had at the time. As 
Treasury Secretary Geithner testified, ``Most of the losses 
that were material did not come from proprietary trading 
activities.''
    Rather, many of the most significant bank losses arose from 
traditional extensions of credit, especially loans related to 
real estate.
    I believe it is fair to say that the Rule's proponents were 
less interested in curing a particular cause of the financial 
crisis and more interested in championing the view that 
commercial banking should be separated from investment banking, 
particularly prop trading and principal investments.
    By barring proprietary trading by banks and their 
affiliates, the Rule's sponsors hope that utility services, 
such as taking deposits and making loans, would once again 
dominate the banking business. But that view reflected more 
hope than experience.
    In light of the fluid and evolving nature of the financial 
markets, it was unlikely that regulation could force a return 
to the financial sector model of an earlier era when banks and 
bank lending were kept separate from the capital markets.
    What has been the result? The Volcker Rule imposes a static 
divide, a financial Maginot Line between short-term proprietary 
trading and banking, but does so within a world where capital 
markets and bank loans compete for corporate lending, and fluid 
financial markets continue to evolve and can sweep around the 
fixed position.
    Changes in the financial markets spurred by the Volcker 
Rule still expose banks to the kinds of risks the Volcker Rule 
was intended to minimize or eliminate. Hedge funds and other 
less-regulated entities, whose activities can affect banks and 
bank risk-taking, picked up the proprietary trading that had 
exited banks and their affiliates.
    Moreover, in order to make up for losses in revenues, 
banking entities shifted their risk-taking activities to other 
businesses, increasing their risk-taking potentially through 
activities with which they were less familiar than the 
proprietary trading they were compelled to abandon.
    The problems around the Volcker Rule are exacerbated by 
practical difficulty in implementing the Rule itself. What is 
proprietary trading, and how is it distinguished from market 
making?
    When implementing the Rule, the regulators noted that it 
was difficult to define certain permitted activities because it 
``often involves subtle distinctions that are difficult both to 
describe comprehensively within regulation and to evaluate in 
practice.''
    Likewise, industry participants have complained that the 
lack of definitional bright lines make it difficult for banks 
to comply with the Rule. As a result, banking entities have had 
to incur substantial costs in order to implement cumbersome 
supervisory and compliance regimes.
    And in order to avoid stepping over the line, many have 
pulled back from permissible market making activities. The 
resulting increase in investors' execution costs and the 
decline in market liquidity means that investors will demand 
higher yields on new bond issuances.
    And you want to note, the challenge is not how much capital 
is raised but the incremental cost to issuers of raising it, a 
cost that affects Main Street as much as it affects Wall 
Street. The result is costly regulation with limited upside and 
the potential for greater downside.
    There are legitimate reasons to be concerned over the risks 
associated with a bank's trading operation. But those risks can 
be more effectively addressed through other means, such as 
imposing capital charges on a bank's trading books and the 
traditional bank regulator's focus on risk management and 
assessing a bank's safety and soundness.
    For those reasons, I believe the Volcker Rule should be 
repealed. Thank you very much.
    [The prepared statement of Mr. Whitehead can be found on 
page 198 of the appendix.]
    Chairman Huizenga. Thank you all very much for your 
testimony. And I appreciate you being here.
    I guess I will start off my line of questioning with a 
quick comment, and then dive into questions. I would like to 
note that although the slides that the ranking member put up 
seemed to look pretty impressive, it is somewhat interesting to 
me, as chairman of this subcommittee, that the Fed staff didn't 
see fit to provide me or Majority staff with any sort of 
briefing on the data.
    I know I am merely the chairman of the subcommittee, but I 
believe that also is true for the actual chairman of the full 
Financial Services Committee, Chairman Hensarling. So I look 
forward to getting that briefing at some point. I also look 
forward to addressing that particular issue with Chair Yellen 
when she is in front of this committee in the future.
    But I don't feel like I can adequately comment on the 
slides because, again, with no real understanding of what the 
Fed is trying to get at, I don't know that I would be able to 
address that.
    I believe, Professor Whitehead, you might have done some 
work on this. So I will look forward to doing that.
    But I will point out that even I understand and appreciate 
that the purpose of the value at risk (VaR) is to measure risk 
and not liquidity, which is, in fact, what we are trying to 
look at here today. And it's easy to note that outliers on 
these, even on those charts, don't present whether they have 
great risk or little risk.
    But I would also like to remind everybody that the point of 
the hearing today is what is the impact of Volcker on our 
capital markets? And the question is, are capital markets less 
liquid as a result of Volcker?
    And I think the answer is a pretty clear ``yes.'' So we are 
not here to debate whether or not banks are making money. The 
question is, are they providing liquidity into the marketplace?
    So Professor Whitehead, I believe you note in your 
testimony that none of the financial regulators have published 
any data or analysis on the metrics that they are required to 
provide. Is that correct?
    Mr. Whitehead. That is correct.
    Chairman Huizenga. And, as you know, what has been made 
public, I guess so far, is a report issued by the staff of the 
Federal Reserve in December which concluded that, ``Since 
Volcker affected deals, dealers have been the main liquidity 
providers. The net effect is that bonds are less liquid during 
times of stress due to the Volcker Rule.''
    So Professor Whitehead, can you please expand on what the 
Fed staff report might be concluding there, and why? I know you 
have some interesting research that you had referenced as well.
    Mr. Whitehead. Sure. Thank you very much, Mr. Chairman. The 
Fed staff report does an analysis that I think is important to 
understand not just in terms of the results, but also the way 
they have conducted the analysis. The question is not aggregate 
liquidity, and the question is not aggregate bond issuance.
    The real focus here is on relative liquidity, the extent to 
which there has been an impact on liquidity as a result of the 
Volcker Rule. And that is what the study does.
    So what they do is they are taking a baseline. They look at 
below investment grade bonds, BB bonds. And they use that as 
kind of a baseline for what liquidity might be generally in the 
market, both before and after the Volcker Rule. What they then 
do is they take a look at bonds that have dropped in credit 
quality.
    And this is key. During times of financial stress, you are 
going to see bonds collapse. And you need to have a market 
maker precisely at that time. This was one of the problems 
during the financial crisis. There was no one there to make 
that market.
    And what they find is, comparing both the pre- and the 
post-Volcker Rule, and using this baseline of below investment 
grade bonds as kind of their gauge as to whether or not the 
Volcker Rule has had an impact, is that when you see a credit 
decline, you see a substantial drop relative to the pre-Volcker 
period of liquidity in the marketplace.
    And, in fact, the point that is probably the most 
distressing in the report is they find that the level of 
illiquidity is quite similar to the illiquidity for similar 
distressed bonds during the financial crisis.
    And so rather than finding no impact, they find quite a 
substantial impact precisely in the class of bonds that we are 
most concerned about, namely those bonds where you need to have 
a market in order to manage your risk, again, during times of 
financial crisis.
    Chairman Huizenga. Thank you for that.
    Mr. Kruszewski, you note in your testimony that Volcker--I 
think the quote is, ``Volcker materially impacts your--and 
presumably, your fellow SIFMA members' as well--ability to 
effectively make markets and that the ultimate impact is a 
higher cost of capital.''
    I would like you to explain, but I do also want to 
highlight that on page 3 of your written testimony, I think one 
of the best lines is, ``A compliance expert would also need to 
be a psychiatrist trained in determining the intent of each 
trade by a trader.'' So if you could maybe unpack that a little 
bit?
    Mr. Kruszewski. Yes, we do need psychiatrists on our 
compliance staff now to get into the minds of our traders 
pursuant to Volcker.
    I do want to just add one thing, if I may? I believe that 
this very debate and the confusion in this debate was 
highlighted by putting up charts on VaR, which is value at risk 
and then using that to make an argument about Volcker.
    I find it to be apples and oranges at best. VaR is risk on 
the balance sheet. What we are talking about is the mechanisms 
to provide liquidity in the plumbing of capital markets. And 
Volcker absolutely hinders that.
    And that is, to answer your question, when we raise money 
for our clients, we commit to make markets. That liquidity is 
needed for efficient raising of capital.
    The Volcker Rule, because of the way it is written and its 
presumption that every trade is a proprietary trade unless 
proven otherwise, is a hindrance and a significant hindrance on 
the ability to make markets and to make effective markets.
    That, in turn, raises the cost of capital. And I do note in 
my written testimony that small issuers, on average, holding 
for credit maturity pay 75 to 100 basis points higher because 
of liquidity.
    Chairman Huizenga. All right, thank you. My time has 
expired.
    With that, I recognize the ranking member for 5 minutes.
    Mrs. Maloney. Thank you. Just to clarify, the information 
that was provided to me from the Federal Reserve was in 
response to a list of questions that I sent to them requesting 
this specific data. I am sure they would be willing to provide 
it to any Member of Congress and meet with them on it.
    But I would like to ask some questions about it to Mr. 
Jarsulic. And I would like to ask you about the Volcker data 
that I put up on the screen.
    My takeaway from the two charts of risk levels on the 
banks' trading desks is that the Volcker Rule has not caused 
banks to pull back from market making even during periods of 
market stress. Is that your interpretation as well, Mr. 
Jarsulic?
    Mr. Jarsulic. Looking at these graphs from a distance, it 
does appear to me that there is essentially stable VaR across 
the various measures. And the VaR is stable even in time 
periods, as you pointed out, where there were some shocks to 
the market, the failure of Third Avenue, for example.
    And that suggests to me that the market making activity of 
the firms that we are looking at here, the firms that the Fed 
is looking at here, remains relatively stable during times of 
stress. And that suggests to me that these market makers are 
providing liquidity services in a very stable fashion.
    Mrs. Maloney. In the second slide, which shows the returns 
the banks are getting from all the different asset classes they 
are trading, it shows a sharp difference between the returns 
that banks are getting on new positions versus existing 
positions.
    Can you talk about why it is important that banks are 
getting most of their returns from new positions rather than 
from existing positions? And what does that say about how the 
Volcker Rule is working?
    Mr. Jarsulic. The positive returns from new positions and 
essentially zero returns from existing positions, as you 
describe these data, suggests that they are earning profits 
from fees and commissions, that is from the assets they take on 
newly into their balance sheet, but that the inventory costs, 
the hedging costs for positions that they hold for longer 
periods of time in total are not producing significant profits 
for them.
    So that does suggest to me that the model is changing, that 
they are moving toward a real market making function where 
market makers try to run essentially flat books and earn their 
fees or earn their profits from fees and commissions.
    Mrs. Maloney. So this data basically suggests that banks 
are not engaging in a significant amount of proprietary 
trading--it is a bottom line?
    Mr. Jarsulic. These data are certainly consistent with that 
view, yes.
    Mrs. Maloney. And I would also like to ask you, do you 
think that this kind of data on Volcker Rule compliance is 
helpful because it allows us to monitor how the banks are 
reacting to the Volcker Rule and the impact that the Volcker 
Rule is having on markets? And do you think the regulators 
should be making this type of data public on a regular basis?
    Mr. Jarsulic. I would certainly agree that transparency in 
the functioning of this regulation and others is certainly 
important. The Federal Reserve, through publication of Y-9s for 
major bank holding companies, provides people with a lot of 
information about how banks are conducting their business, and 
therefore, you have direct and indirect information about the 
functioning of regulation.
    I think people are interested, and rightly so, in the 
effect of the Volcker Rule and other regulations. And to the 
extent that these data can be produced on a regular basis to 
make the functioning of the financial system and the impact of 
the Rules transparent seems like a great idea.
    Now, there may be issues about how data are presented, how 
frequently, whether it ought to be current or not, what level 
of aggregation it needs to be presented. And I am sure the Fed 
would have views on that. But in general, I think the more 
transparency, the better.
    Mrs. Maloney. Thank you. My time has almost expired. Thank 
you.
    I have other questions if there is a second round. Thanks.
    Chairman Huizenga. The gentlelady yields back.
    With that, the Chair recognizes the vice chairman of the 
subcommittee, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    And thank you all, again, for being here.
    I want to address my first question to Mr. Kruszewski. Your 
written testimony notes that small and midcap issuers have 
experienced a disproportionately negative impact under 
structural changes to our fixed income markets, including the 
Volcker Rule.
    Citing your written testimony, ``Since 2010, the number of 
deals sized at $2 billion and above has doubled, whereas the 
number of smaller deals, below $2 billion, has fallen by nearly 
half.'' Why do you believe these small and midcap issuers are 
experiencing a disproportionately negative impact?
    And, as you know, small and medium companies are the 
foundation of competition and growth for our economy. So I 
think this is an important question for us to understand.
    Mr. Kruszewski. It is not only in the bond markets. It is 
across the spectrum of capital raising. So you will note that, 
and I am sure there is plenty of testimony about why we don't 
have very many IPOs anymore either.
    For the debt markets, you need liquidity to efficiently 
price bonds. And it has become increasingly difficult. And 
Volcker is one reason to provide liquidity to the buy side to 
buy a bond. I find these charts interesting, that seem to 
suggest that banks are complying with Volcker. They are 
complying with it. It is the law.
    The question is the impact of that on issuing companies. 
And what my testimony, written and oral, says, and then from my 
position of being a market participant, I will tell you that if 
the intent of the Volcker Rule is to raise the cost of capital 
on job-creating companies, then it is a huge success.
    If its intent is to try to reduce some systemic risk in the 
trading books, there is no need for that. The ultimate cost to 
the economy is less liquidity and higher cost for smaller 
companies.
    Mr. Hultgren. Mr. Kruszewski, you probably have heard Jamie 
Dimon's quote. He said, ``If you want to be trading, you have 
to have a lawyer and a psychiatrist sitting next to you to 
determine what your intent was every time you did something.'' 
Or maybe Governor Powell's quote, ``The Volcker Rule 
effectively forces you to look into the mind and heart of every 
trader on every trade to see what their intent is.''
    I wonder if you could describe how the Volcker Rule's 
datacenter compliance framework attempts to replicate this 
concept of mind reading, and what compliance challenges does it 
pose for companies like yours?
    Mr. Kruszewski. First of all, the Volcker Rule has a 
presumption that every trade is a proprietary trade unless 
otherwise shown and then tries to use metrics to prove that 
point, or at least to allow you to have a safe harbor to get 
out at that point.
    And again, this will go back to why it is hard for small 
companies. The very definition of liquidity requires that in 
times of market making and in times of stress, you will make 
markets that will be different than the RENTD requirement of 
Volcker.
    In times of stress, there is more demand or more supply, 
and that is when you need to step up and do that. The Rule is 
very interesting in that even if you have an intent to meet 
customer demand but do not do so in a timeframe, you are in 
violation of the Volcker Rule.
    So you put all of these things together, and from my 
perspective I obviously do not want to violate any law of the 
land, what we will do is we have compliance and try to use 
these metrics which, as I testified, significantly and 
materially impacts our ability to make markets, especially in 
small, illiquid issues which, again, are bearing the brunt of 
the Volcker Rule.
    Mr. Hultgren. Mr. Blass, page 10 of your testimony includes 
a line from Vanguard describing how liquidity is obtained along 
a cost continuum. I wonder if you could explain how reductions 
in liquidity under the Volcker Rule, like we are discussing 
today, impact funds and those who depend on them for retirement 
security?
    Mr. Blass. Thank you very much. I think if you polled our 
members, they would give you a disparate view of liquidity in 
the markets. There are some interesting data points. If you 
compare today's markets in corporate fixed income compared to 
the markets 10 years ago, you will see smaller transaction 
sizes, fewer block trades. It is more work to execute 
transactions.
    There are some other data points. The transactional volume 
remains robust, so across our membership they will find that 
liquidity is available, recognizing that there are many other 
market participants.
    To your question, to the extent that market liquidity is 
not available, or becomes less available, it certainly drives 
up costs to market participants seeking to access certain 
instruments.
    Mr. Hultgren. Thank you. My time is winding down, so I will 
yield back.
    Chairman Huizenga. The gentleman yields back.
    The Chair recognizes Mr. Himes from Connecticut for 5 
minutes.
    Mr. Himes. Thank you, Mr. Chairman. And I thank you all for 
being here. This is an important and interesting topic, one I 
have looked at for a long time. And I have studied the 
testimony here closely.
    Mr. Kruszewski, I have studied your testimony particularly 
closely, but I keep stumbling over this line in your testimony 
where you say, ``The Volcker Rule includes a provision called 
RENTD, a concept only the Government could devise.'' What do 
you mean by, it is a concept only the Government could devise?
    Mr. Kruszewski. From a business perspective, you can't 
implement it.
    Mr. Himes. I know, but you are pointing at the Government. 
What does it mean, ``a concept only the Government could 
devise?''
    Mr. Kruszewski. I think I answered it. I did say it is a 
concept that from a business perspective--as I said, I still do 
not understand the concept--
    Mr. Himes. I will get to that. I am just troubled by the 
derogatory quality of that. Can you tell me what the three 
largest banks in the United States are today?
    Mr. Kruszewski. Do I know the three largest banks?
    Mr. Himes. What are the three largest by assets in the 
United States today?
    Mr. Kruszewski. JPMorgan, Wells, and Bank of America.
    Mr. Himes. It is JPMorgan, Bank of America, and Citigroup. 
And my question for you is, would any of those three banks, all 
of whom are your members, exist in anything resembling their 
present form had they not been recipients of the Troubled Asset 
Relief Program (TARP), a Government program?
    Mr. Kruszewski. You should ask them. I don't want to answer 
questions for them.
    Mr. Himes. But you, in your derogatory treatment of the 
government, would at least acknowledge that those three banks 
would have a hard time being with us today had it not been for 
a government program?
    Mr. Kruszewski. To the extent you take my comment as 
derogatory, I did not mean it that way, so I apologize if you 
read it as derogatory. I meant it from a business perspective.
    Mr. Himes. Okay. Well, let us go to reasonably expected 
near-term demand, which is the subject here. And I actually 
think this is really interesting. I don't actually have that 
much problem with the idea of a reasonably expected near-term 
depend.
    I sort of explain it in terms of small business. You know, 
in my district, if we have a Toyota dealer and the Toyota 
dealer sells 100 Toyotas a month, he keeps 120 on the lot, 
maybe 130. He doesn't keep 400, and he doesn't keep an Aston 
Martin.
    If he is keeping 400 or if he is keeping an Aston Martin, 
something is happening there other than him keeping an 
inventory that is consistent with reasonably expected near-term 
demand.
    And by the way, I will stipulate that this is a complicated 
Rule and it is hard to draw those fine distinctions, but isn't 
the fundamental idea that the banks ought to be able to keep 
enough inventory to make markets but they shouldn't have a lot 
more volatile assets on their books? Isn't that fundamental 
principle pretty reasonable?
    Mr. Kruszewski. To make markets by rules and metrics, you 
don't have a rule that says that that dealer can only have 100 
cars. It is up to that dealer to determine reasonable demand. 
He may or may not be wrong, and he will mark down his inventory 
appropriately.
    You just are creating a rule which limits liquidity. If 
that car dealer wants to make a loan, if he is a public 
company, the Rule that you put in place will raise the cost to 
capital for that car dealership.
    Mr. Himes. No, I understand that, and of course there is a 
pretty dramatic difference between my Toyota dealer and the 
bank, which is that the Toyota dealer is disciplined by the 
fact that if he keeps 700--in my example--cars on the lot and 
it goes wrong, he goes out of business.
    And the FDIC is not there to bail him out. The TARP is not 
there to bail him out, the 1994 Peso rescue is not there to 
bail him out. So I guess my big question, and this is for the 
panel as a whole, I have heard a lot of talk about short-term 
proprietary trading.
    Does anybody here think that FDIC-insured institutions 
should be taking long-term proprietary bets? Okay. The silence 
there I am going to take to be a ``no.''
    Does anybody think that the real exercise here is not so 
much making it possible for depository institutions to make 
proprietary bets of any kind, but the Holy Grail here is to 
make sure that they have enough near-term inventory to make 
markets? Or does somebody want to make the argument that they 
should be able to take proprietary bets?
    Mr. Kruszewski. I think the difference is that drawing a 
line between market making and proprietary bets, as Volcker 
tries to do, is extremely difficult when you put it into law, 
and will cause financial institutions not to make markets 
because every trade is presumed under Volcker to be 
proprietary. That is bad policy.
    Mr. Himes. No, no, and I will grant you that. I actually 
think it is a pretty complicated rule and I understand Jamie 
Dimon's comments about psychology.
    But I think this is an important point, because I think 
that the burden is not on the regulators to explain why insured 
institutions should not be able to take proprietary bets. I got 
total silence here when I asked whether those institutions 
should take proprietary bets of any kind.
    I would just point out that I think the burden is on the 
industry to come up with constructive ways, if there are more 
constructive ways, of determining a legitimate inventory as 
opposed to making the argument that we should take away the 
idea that proprietary trading is somehow permissible inside a 
depository institution.
    So I thank you for being here.
    And thank you, Mr. Chairman.
    Mr. Hultgren [presiding]. The gentleman's time has expired.
    The Chair recognizes the gentlewoman from Missouri, Mrs. 
Wagner, for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman, and thank you all for 
appearing here today to discuss the effects that the Volcker 
Rule has had on our capital markets, specifically on market 
making, which is important for holding down the cost of credit 
for consumers from credit cards, mortgages, to businesses that 
are seeking to issue debt and raise capital.
    Additionally, it also helps savers by allowing the funds 
that they are invested in to easily sell assets at a 
competitive price in order to meet redemption calls from its 
investors.
    For these reasons, the Volcker Rule is not something that 
simply affects broker-dealers and traders, but it has an impact 
on U.S. companies, their employees, and individuals saving for 
retirement or to send their kids to college.
    Mr. Quaadman, welcome back, and I believe the notion behind 
the Volcker Rule was that it would prevent Wall Street-sized 
banks from engaging in proprietary trading, but can you discuss 
how many other institutions that don't conduct any proprietary 
trading, even community banks, for instance, have been affected 
by the Volcker Rule in having to prove to regulators that they 
are not engaged in these activities?
    Mr. Quaadman. Yes, thank you, Congresswoman Wagner. First 
of all, I would also just like to state, too, that in January 
2012 at a hearing here, Governor Tarullo also mentioned that 
the regulators who were drafting the Volcker Rule did not 
understand the markets or the products that they were trying to 
regulate here. So I think that is important to note.
    In terms of how this impacts other institutions, there are 
many institutions, including regional banks, even sometimes 
joint ventures overseas that non-financial businesses are 
engaged in, that have to create Volcker compliance programs.
    So I think even if the intent was to look at a small number 
of institutions, this has actually been broadened out. And as 
you start to put that on mid-sized and regional banks, that 
does have liquidity impacts on Main Street.
    Mrs. Wagner. I appreciate that.
    I have a couple more vocal questions, and I know this 
question is a bit off topic, Mr. Chairman, but I would ask your 
indulgence. I feel it is timely as we approach the April 10th 
applicability date of the Department of Labor's fiduciary rule.
    I would like to address a question to Mr. Kruszewski, who 
is, by the way, a constituent of mine. He is chairman and CEO 
of Stifel and is very active in the community affairs in the 
Greater St. Louis area, and here on behalf of SIFMA.
    Sir, I do not find your testimony to be in the least bit 
derogatory. I find it common sense, and frankly, refreshingly 
honest. You deserve the respect of this committee, as do all of 
you.
    Mr. Kruszewski, could you please explain the effect that a 
lack of certainty in waiting on the Administration to delay the 
Rule has had on your business as we get closer to the 
compliance date and the impact this misguided rule could have 
on your customers?
    Mr. Kruszewski. Thank you, first of all, but there is a lot 
of confusion regarding the Department of Labor rule and 
certainly the implementation date, which has clients and the 
industry and you name it, very confused as to how, if, and when 
this will be implemented.
    As I have testified in front of the DOL in a number of 
cases, this rule, while well-intended in certain cases, will 
have the result, for my clients, and I only speak to our 
clients, we have tens and tens of thousands of clients who will 
either lose advice or will have their costs raised, and raised 
significantly, because we will move them to a fee basis to do 
that.
    And I find that, and I have said I have found that to be an 
unintended consequence of this rule and a very costly one to a 
significant number of our clients, tens of thousands.
    Mrs. Wagner. Tens of thousands of low- and middle-income 
investors.
    Mr. Kruszewski. This rule significantly impacts small 
savers.
    Mrs. Wagner. Thank you very much. I appreciate it.
    Let me go back to Mr. Quaadman in my brief time. As you 
know, President Trump earlier this year issued an Executive 
Order on core principles regarding regulations affecting the US 
financial system to determine if laws and guidance promote 
fostering growth and enabling U.S. competitiveness.
    Do you believe the Volcker Rule can promote those 
principles outlined in the President's Executive Order?
    Mr. Quaadman. No. It has made it more difficult for smaller 
and mid-sized businesses to raise the capital that they need 
and that it has not made the capital markets at all more 
efficient. And it has, in fact, built in many inefficiencies, 
particularly when combined with the other regulations that I 
was talking about as well.
    Mrs. Wagner. Thank you very much. My time has expired.
    I yield back, Mr. Chairman. Thank you.
    Chairman Huizenga. The gentlelady yields back.
    With that, we recognize the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Yes, and thank you very much. I really cannot 
stress enough how important the Volcker Rule is. I call to your 
remembrance the situation with the London Whale, I believe it 
was, where proprietary funds, banks' customers' funds were used 
for risky bets. That caused a problem.
    The Volcker Rule must stay in place. But that is not to say 
that we do not want to make sure that it is working as it is. 
One of the goals of the Volcker Rule was to de-risk the 
markets. And as we all know, in pre-2008 banks were, indeed, 
allowed to take these risky bets with fully federally-insured 
dollars, putting the taxpayers at great risk, ergo the London 
Whale.
    But with that said, we will never be able to fully de-risk 
financial markets because we all know that fully de-risking 
markets is not what is best for the average American because 
almost every bank in the country, big and small, will go out of 
business. Because banks, indeed, have to make money as well.
    So with that said, Mr.--I am afraid, and I do not want to 
mess up anybody's name, but I just got here, so I didn't have 
time to practice. But I think it is Mr. Ronald--
    Mr. Kruszewski. Kruszewski.
    Mr. Scott. --Kruszewski? I'm sorry. And maybe Mr. Jarsulic. 
I think you are the two that I want to ask this question. I'm 
sorry. I hope I didn't do too badly.
    Do you agree with what I am saying? What sort of economic 
growth will we have if you completely de-risk the system? And 
give me your understanding of the Volcker Rule, from your 
perspective. Did it go too far in de-risking or did it do too 
little?
    Mr. Jarsulic. Congressman, I do agree with you that 
financial institutions are in the business of bearing risk, and 
I think there is no attempt with the Volcker Rule or other 
regulation to end that function.
    I think that the Volcker Rule is intended to constrain 
certain highly risky activities, at least in the part of the 
financial system that has direct and indirect support from the 
Federal Government and the taxpayer. So in that regard, it is a 
reasonable rule.
    I think that the Volcker Rule, given a close look at the 
evidence, has done very little harm and actually seems to have 
left liquidity and market making in at least as good a shape as 
it was before the implementation of that Rule.
    Maybe I could take a moment here to speak about the 2016 
Fed study that people have cited as evidence that under stress 
conditions, there is--
    Mr. Scott. What was that study? I'm sorry, I didn't--
    Mr. Jarsulic. In 2016, there was a Federal Reserve staff 
paper which looked at the effect of downgrades in bond ratings 
and concluded that post-Volcker, the price effect of those 
downgrades was bigger. And they drew the implication from that, 
that markets were less able to react to stress.
    Mr. Scott. I want to get to Mr. Kruszewski, too--
    Mr. Jarsulic. Okay.
    Mr. Scott. --in the next 40 seconds. What is your take on 
this?
    Mr. Kruszewski. First of all--
    Mr. Scott. Where am I going right or wrong on this?
    Mr. Kruszewski. First of all, if you want to limit the 
risks of the banks, then tell them not to make loans. That is 
where the biggest risk is. Let's look at the loan book. That is 
where the financial crisis has its roots was in the loan book.
    There was no trading desk at Fannie Mae and Freddie Mac or 
Countrywide. There are no trading desks. All right? What you 
are talking about here, capital rules will and are proper to 
limit the risk on the banks.
    What the Volcker Rule is trying to deal with is the short-
term trading and the mechanism to provide liquidity so that you 
have the efficient raising of capital, primarily for small 
companies.
    And this rule limits my firm, and I don't--with all due 
respect to all the studies that are going on here, I run a firm 
that tries to make markets in compliance with the Volcker Rule. 
And I will tell you that our ability to do so has been 
significantly impacted, raising the cost of capital for 
companies that are creating jobs in this country.
    Mr. Scott. All right. Thank you very much.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Arkansas, Mr. Hill, 
for 5 minutes.
    Mr. Hill. Thanks, Mr. Chairman. Thanks for convening this 
important hearing.
    And I was struck by my former colleague Governor Powell's 
statement that what the current law and rule do is effectively 
force you to look into the mind and heart of every trader on 
every trade to see what the intent is. And so I wonder, does 
Stifel have Ouija Boards on their trading desk? Because that 
was one of my favorite games as a kid, to ascertain the intent 
of everyone.
    But seriously, do you believe that when you have a rule 
that is this complex that it is just almost too difficult to 
comply? My experience in the financial services industry is 
that when you have a rule, your compliance officer and your 
general counsel walk back from that rule in order to be even 
more conservative so there is no foot fault on what has already 
become a super complex issue.
    So what is Stifel's worry about that? And every day how do 
you ascertain Mr. Himes' idea of 700 cars versus 120? How do 
you try to do that daily?
    Mr. Kruszewski. From my perspective at Stifel, you cannot 
do that, because what my compliance and general counsel tell me 
is that the evaluation of what was in the mind of the trader 
will be questioned with the benefit of hindsight.
    And so it is like going to the car dealer who wanted 100 
cars and he only sold 30. Then he must have prop-traded on the 
other 60, but at the time that he bought the 70, he had full 
intentions of selling 100.
    Mr. Hill. Yes.
    Mr. Kruszewski. Any rule that tries to, as Governor Powell 
says, get into the minds of a trader, is simply not workable.
    Mr. Hill. Yes. I really think that this sort of thing of 
that daily trading work is really best handled by strict 
capital and liquidity rules and not trying to carve out 
something unique. I just think it is--Potter Stewart couldn't 
figure it out, so I am sure we can't.
    My next question is, if proprietary trading has no social 
good or value in creating liquidity and creating markets, then 
why does Congress exempt U.S. obligations and those of States 
and municipalities from proprietary trading? I am missing 
something.
    Tom Quaadman, do you want to take that question?
    Mr. Quaadman. That is a very good question, because if you 
take a look at the Volcker Rule, if you take a look at Basel 
III, if you take a look at a number of other rules, U.S. 
Treasuries are always exempt. And as I was talking to a 
corporate treasurer, he said the impact of all these rules, at 
the end of the day, to their logical outcome, is companies are 
going to have to put their financial resources into U.S. 
Treasuries.
    And what we have seen over the last several years is a 
chronic shortage in U.S. Treasuries, as well as stresses in 
those markets.
    Mr. Hill. I have also heard from community banks.
    And I wonder, Ron, your comments on this. Community banks 
are saying they had to sell off profitable businesses and 
investments because of the Volcker Rule. And I think Congress, 
back in 1958, specifically said you can invest 5 percent of 
capital and surplus in small business investment corporations 
(SBICs).
    And I don't think anyone has criticized that for almost 60 
years now, using just a simple, ``can for'' test to invest in 
small and intermediate lending, to enhance net interest margin, 
to have some diversification at bank and bank holding 
companies. And yet, I think people are divesting similar 
investment funds in which they are not sponsoring--they are 
just simply a passive investor.
    Have you seen community banks divest at the holding company 
or bank level where they have just made a passive investment 
in, say, a community bank fund sponsored by your firm?
    Mr. Kruszewski. Again, it goes--
    Mr. Hill. Yes, all because of Volcker, right--
    Mr. Kruszewski. Totally.
    Mr. Hill. --because there is a perceived problem that they 
might--
    Mr. Kruszewski. This deals with the complexity of the 
covered fund rule in Volcker and what is permissible or not 
permissible. Again, this is--
    Mr. Hill. Is that something that we should pay specific 
attention to in what we are doing? I know we are proposing to 
repeal the Volcker Rule. But in terms of a nuance, can you talk 
a little bit more about that for--
    Mr. Kruszewski. I think if you are going to modify Volcker, 
you need to look at the covered rule. I think, Mr. Blass, that 
is what your testimony was about in many ways. And so we have 
to look at that.
    Mr. Blass. Yes.
    Mr. Hill. Mr. Blass?
    Mr. Blass. I agree entirely. The covered fund definition is 
very confusing. The regulators seem to be targeting hedge fund, 
private equity-type activity. But they over-included and 
included some very different types of activity.
    I have an example in our written testimony about tender 
offer bonds, which are a very simple mechanism for holding 
municipal securities, just holding them in a bank trust. And 
banks have no longer been able to sponsor those in many 
different sectors.
    Mr. Hill. Good. Thank you for that testimony.
    Thank you, Mr. Chairman.
    Chairman Huizenga. The gentleman's time has expired.
    With that, I don't see any Members on the other side of the 
aisle, so I will go to Mr. Emmer from Minnesota for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chairman.
    And thanks to the witnesses for being here today. I 
appreciate your time.
    Last Congress, I understand this committee received 
testimony from a number of market professionals about the 
current impacts of regulation on fixed income market liquidity.
    One of the witnesses in one in these hearings in the last 
Congress stated that the net effect of post-crisis regulations 
is to ``remove productive capital out of the real economy and 
leave it stranded in government securities.''
    And I think I will start with Mr. Kruszewski. Do you 
believe the U.S. economy is already experiencing these impacts 
in this real economy, even though many of these regulations are 
still being implemented?
    Mr. Kruszewski. Yes, although I do want to say that the 
capital rules and many of the Rules that were focused on 
raising capital and liquidity in the banks were well-thought-
out and done well. And I don't want to suggest that that is not 
the case.
    But I do want to say that there are a lot of rules that 
need to be relooked at, which is what I think this committee is 
doing in looking at Dodd-Frank. And specifically, the Volcker 
Rule is an example where the financial system in any 
capitalistic society has the requirement to provide liquidity. 
And this Rule significantly hampers that.
    And when you pull capital out of an economy, you are going 
to--the U.S. Government market doesn't need the liquidity. It 
is the largest market in the world. It has liquidity almost by 
definition. To exempt Volcker from it, I almost smiled at, 
because it doesn't need liquidity. My clients need liquidity. 
My clients who are trying to raise capital need liquidity. And 
Volcker sucks liquidity from those clients.
    Mr. Emmer. It is actually access to capital that we are 
talking about. And I go back a couple of questioners. The 
reason I put this to you first is you said it is making capital 
more expensive and harder to achieve for your clients, access 
to capital.
    And I go back to my question, in your experience, is this 
having an impact on our real economic growth?
    Mr. Kruszewski. Well, if you can't raise capital, you are 
not going to invest and have CAPEX, and you are not going to 
create jobs.
    And what I see is many companies, smaller companies today--
and I think this committee should take note that many small 
companies today do not go public, do not have access to the 
capital markets in an efficient manner, and ultimately exit by 
selling themselves to their larger competitors. I note that in 
my testimony.
    Mr. Emmer. Right.
    Mr. Kruszewski. And I believe that the health and vibrancy 
of the U.S. economy requires that our market structure and the 
Rules that we put in place, which has significantly impacted 
the ability to raise capital and has impacted job formation, 
needs to be looked at and needs to be looked at post-haste.
    Mr. Emmer. Mr. Quaadman, I want to take this a little bit 
further, because my colleague, French Hill, worked on the 
banking side of it. And he was making sure that he could make 
that accessible to his customers, his clients.
    I am on the business side of it, and you are, too. You are 
representing all kinds of businesses. And we have this anemic, 
that some people want to celebrate, 2 percent or less annual 
economic growth. It is pathetic.
    When you look at this situation, if you start to get five 
agencies implementing this rule that is so complex that people 
who are experts in it even have trouble applying it and knowing 
what their liability might be, what do you think the impact has 
been on the economic growth in this country?
    Mr. Quaadman. It has had a negative impact. And as we 
outlined in the Thacker study, this does have impacts on 
capital spending and the like.
    But let me give you one example. I talked to a corporate 
treasurer and he described for me a few years ago that he had 
to go in the day after Thanksgiving. He had to sell commercial 
paper in order to pay bills for the company.
    Obviously, it was a slow trading day. The bank comes back 
at the end of the day and says, we were only able to sell half 
the commercial paper, but here is the full amount, and we 
aren't going to be able to sell the rest. So the bank took on 
the risk. His point was that post-Volcker, that transaction 
does not happen.
    Mr. Emmer. Right.
    Mr. Quaadman. The bank doesn't want to engage in that. The 
company can't engage in that capital in that way. And actually, 
that lack of sale of commercial paper takes money out of the 
productive economy. So they have to operate on a much longer 
time horizon and then much more inefficiently as well.
    Mr. Emmer. So it has had a real impact on our economic--
    Mr. Quaadman. Yes.
    Mr. Emmer. --growth. Thank you very much.
    I see my time has expired.
    Chairman Huizenga. The gentleman's time has nearly expired.
    With that, we will go to Mr. Davidson from Ohio for 5 
minutes.
    Mr. Davidson. Thank you, Mr. Chairman.
    And thanks, Mr. Quaadman. I really think Mr. Emmer asked a 
good question. It was going to be one of my first in the queue, 
what are real-world examples of how this is affecting 
businesses?
    And so, in the background, it is easy to see how the 
regulatory state and the regulatory environment are impacting 
access to capital, from what you just described in the bond 
market.
    I am curious if anyone on the panel has a similar example 
in currency markets, is a lot of the things along with the 
regulatory environment with Volcker combined with the currency 
markets has affected that.
    A lot of examples we talk about, this London Whale issue 
and things like that, but currency markets is another important 
way for things to clear. It is a highly liquid market. How is 
Volcker impacting it?
    Mr. Quaadman. I think there are a number of different 
impacts there. And, obviously currency trading is integral for 
the ability of our members to trade overseas and to do overseas 
deals. And that is much more difficult.
    And the reason why I was raising some of the other rules is 
when you also take the foreign bank operations rule, it has 
also retreated those banks from being a liquidity provider here 
in the U.S. and also to act as a counterpart in currency 
trades.
    But I think we have to also look at some of these other 
rules in conjunction with Volcker because, as I said, they do 
all sort of combine at the corporate treasurers' desk and have 
made their life more difficult their ability to service the 
company more inefficient.
    Mr. Davidson. Thank you.
    I am curious, on the bank regulatory side, when you are 
looking at how the banks are being assessed, there are four 
agencies that--or at least four as of this writing here--are 
charged in a 94-word sentence on page 247 with working together 
to enforce that.
    And just some real-world examples, if you could, about how 
well is that working?
    Yes, please?
    Mr. Blass. I would be happy to volunteer one. The agencies 
are required to work together even to issue guidance that is 
helpful to the industry or needed by the industry to make the 
Rule work.
    In our example, we had a rule that seemed to prohibit new 
fund launches using seeding capital from fund managers that are 
affiliated with banks. It took the agencies 3 years to work 
together to ultimately issue that guidance just a week or two 
before the Rule went into compliance. That causes all kinds of 
disruption to a business, as you might imagine.
    Mr. Davidson. Of course.
    Mr. Blass. For our industry, that is a critical function, 
being able to launch new funds, so it was very disruptive.
    Mr. Davidson. Yes, and so you put those things together, 
whether it is the supply or the demand of the service that 
banks provide, how is that affecting the market today? How 
would the future be better today with or without Volcker?
    And I will just ask Mr. Jarsulic?
    Mr. Jarsulic. Sorry. If your question is how would the 
economy be functioning without Volcker, I think that if you 
look at the evidence on the effectiveness of market making, on 
the statistical measures of liquidity in the secondary markets, 
I think that the Volcker Rule has not done any damage. And, in 
fact, it has preserved the good functioning of those markets.
    And at the same time, we have managed to make our banking 
system a bit safer because we have blocked off a source of 
potential tail risks to the banks that in the past were 
engaging in proprietary trading.
    Mr. Davidson. Okay. So thanks--
    Mr. Jarsulic. So I think that there is an overall gain from 
this. Rather than--
    Mr. Davidson. Okay. So your take is is that the markets are 
addressing the need in other ways. And I guess I would ask, 
down the way--
    Mr. Jarsulic. No, no, I am not--
    Mr. Davidson. Professor Whitehead, perhaps, your 
perspective on how accurate that is?
    Mr. Whitehead. Yes, sure. The Fed report actually indicates 
that roughly 93 percent of the market making activity that was 
taking place pre-Volcker was done by large banks that are no 
longer available because of Volcker; they are now pulling back.
    And so the question is whether or not hedge funds, 
insurance companies, mutual funds, and other sort of non-
Volcker broker dealers are stepping in. And the Fed report 
directly addresses this and suggests that it is not happening, 
that you are seeing a drop in liquidity notwithstanding the 
expectation that there might be some backfilling.
    Mr. Davidson. Thank you. My time has expired.
    Chairman Huizenga. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Foster, is recognized for 
5 minutes.
    Mr. Foster. Thank you, Mr. Chairman. And I would like to 
yield my time to my colleague from Connecticut, Mr. Himes.
    Mr. Himes. I thank the gentleman from Illinois. And again, 
thank you all for being here. In my previous round of questions 
I think I can conclude that there wasn't a lot of appetite for 
the idea of permitting depository institutions to take 
proprietary bets.
    I think we went through long term and short term, and I 
didn't sense a lot of enthusiasm for that or for investment in 
hedge fund vehicles.
    A repeal of the Volcker Act, of course, would allow that to 
happen. So I want to get behind an issue here that I think is 
really interesting and hopefully you can help us with. There is 
ambiguous data, and we are hearing if from the panel today, 
about whether the Volcker Rule is, in fact, compromising 
liquidity in the markets.
    There is not a lot of ambiguity around whether the markets 
are healthy. New issuance is high. We have some question about 
whether smaller issues are affected.
    But let me ask this and I will ask it of anybody. I get 
frustrated in these conversations because the premise is there 
is not enough liquidity, or there is not enough credit 
availability, or there are not enough IPOs happening. So let me 
just ask this as a starter question.
    Is more liquidity always good? Is there some--let me put it 
this way. Is there some optimal level of liquidity above which 
the system becomes risky, below which capital markets aren't 
functioning well?
    Mr. Kruszewski. Well, I can say liquidity comes at a price 
on either side. So liquidity comes at a price and you can argue 
that too much liquidity isn't good either in terms of just too 
much money flashing around. So liquidity comes at a price.
    But I do want to just say that when you talk about our 
long-term proprietary bet that we make at Stifel is to make a 
loan. That is our long-term proprietary bet. The short term 
that we are talking about here, in my opinion, is harmful. It 
takes away liquidity. So you are pricing liquidity too dearly 
with the Volcker role.
    Mr. Himes. No, and I understand that. I appreciate your 
business. Banks are in the business of making loans. They are 
arguably not in the business of making other proprietary bets.
    And to your point, I am not dismissing your statement. 
There are others. I have a letter here from Vanguard that says 
that it has had no problem finding liquidity in counterparties 
in the market.
    So I guess let me come back to my question, which is a very 
serious question because it should inform what we are doing 
here. I think most would agree that infinite liquidity is not a 
good thing. And therefore, there is some optimal level of 
liquidity.
    Too little is not good. Too much is not good either. So I 
am looking--no one up here can say there is not enough 
liquidity in the market unless they can also say here is the 
optimal level.
    So I am just looking for help from anybody in terms of, how 
will we know when there is optimal market liquidity? Because if 
we don't answer that question, none of the statements about 
there is too little or there is too much mean anything. So help 
us establish what the optimal--how we will know if we are at an 
optimal market liquidity level?
    Mr. Kruszewski. All I will say is that the market will get 
to the optimal level. You won't get to the optimal level 
through regulation.
    Mr. Himes. I was a banker for a long time. And oftentimes 
when the market forces have been most active, there has been 
too much liquidity and catastrophe that followed. This goes 
back to the South Sea bubble hundreds of years ago. So I am not 
sure I buy that premise.
    But, again, and let me actually single out Professor 
Whitehead, because this is a pretty academic question, none of 
our statements about whether we have too much or too little 
liquidity mean a darn thing unless you can anchor me in some 
concept of optimal liquidity. So how do we do that?
    Mr. Whitehead. Sure. So again, I will take you back to the 
Fed report, which I think tries to do just that. They are 
taking a look at the BB index. They are looking at that as the 
baseline. And then they are looking at instruments that drop in 
credit value down from whatever they were down to something 
that is near BB.
    And what they are doing is comparing the two. And they are 
saying, well, look this BB we look at it pre-Volcker and post-
Volcker. And that is our baseline.
    Now let's see what happens when we have this decline, which 
is really sort of a gauge for stress. And what we see in that 
instance? There is a pullback. So that is your baseline, right? 
Your baseline--
    Mr. Himes. A pull back from when, though?
    Mr. Whitehead. A pull back relative to what you see in 
terms of pre-Volcker versus post-Volcker.
    Mr. Himes. Yes, yes. The pre-Volcker--none of us want to go 
back to 2008, right? Where I would argue you had a surplus of 
liquidity, so again--
    Mr. Whitehead. What I am saying is the baseline isn't pre-
imposed. The baseline is the BB which is pre-imposed. In other 
words, they are taking a look at the stress analysis both 
before Volcker and after Volcker relative to a baseline that is 
a below investment grade, index, these BB instruments.
    And so the idea, as I was saying earlier, it is not a 
question of absolute. It is a question of relative liquidity. 
And so they are trying to judge whether or not as a result of 
Volcker you see this decline relative to this, again, baseline 
of BBs. So your baseline kind of would be, maybe not optimal, 
but certainly some sense of what we are looking at independent 
of this drop in credit quality.
    The drop in credit quality is kind of this way to estimate 
what happened during the financial crisis. And what they see is 
is that as a result of the drop relative to this baseline of BB 
instruments that you actually see a pullback in terms of 
liquidity.
    So I think it is hard to sort of pinpoint a number, which 
is what you are looking for, I think, or some optimal number. 
And I believe that is what the testimony before was really 
getting at in terms of the market, that you are not going to 
have an optimal number.
    But what I think you can do is gauge it relative to other 
indices like they do in the Fed report. And that is why they 
conclude that in times of stress you do see this problem. Or 
you are likely to see this problem, again, relative to this 
more standardized BB index.
    Mr. Himes. Thank you very much. I appreciate it.
    Thank you, Mr. Chairman.
    Chairman Huizenga. The gentleman's time has expired.
    I now recognize the gentleman from Indiana, Mr. 
Hollingsworth, for 5 minutes.
    Mr. Hollingsworth. Good morning. Thanks, everybody, for 
being here. I have really appreciated the testimony this 
morning.
    And specific to Mr. Kruszewski, I certainly appreciate your 
healthy, and I think very warranted, skepticism for government 
solutions being promulgated on business.
    I often think back about a quote somebody gave me which is, 
``If you think our problems are bad, just wait until you see 
our solutions.'' And I frequently think of this with regard to 
government, and specifically with regard to this.
    Can you help me better understand, because I think there is 
some misunderstanding about the cause of the crisis. And when I 
think about the cause of the crisis, I think about loan books. 
I don't think about prop trading desks. I think about the risks 
that were taken on those books. So I guess for you Mr. 
Kruszewski, can you tell me a little bit about what you felt 
like caused the crisis?
    Mr. Kruszewski. Yes. I will add to the 100 books--
    Mr. Hollingsworth. Yes.
    Mr. Kruszewski. --that have tried to explain the crisis. 
The crisis is interesting. Simply, you take leverage and you 
take loans and you combine rating agencies and misconceptions 
of a whole bunch of things and you package them together. And 
when the house came apart it came apart big. And it is that 
simple.
    Mr. Hollingsworth. Okay. And when these banks were making 
these bets on mortgages, they are inherently taking certain 
risk. And my colleague, Mr. Himes, talks about those being of 
lesser risk. But they are inherently taking long term bets both 
on interest rate and credit risk, right?
    The typical residential mortgage is 30 years in this 
country. And so, when we talk about short-term proprietary 
trading versus long term proprietary trading, the reality is on 
a loan book there is real risk, and real long-term risk if that 
is not--
    Mr. Kruszewski. I think it is important that in any 
capitalistic society that when you have a crisis, the financial 
system will be in the middle of it, because the financial 
system is an intermediary and it provides loans and crises will 
come out of leverage and loans.
    And so on one hand you can simply almost eliminate that if 
you de-risk the system--
    Mr. Hollingsworth. Right.
    Mr. Kruszewski. --and just make no more loans. You are not 
going to have a crisis. But we need loans and we need good 
capital rules.
    To address, just quickly, the one question, what is too 
much liquidity? What I would say to that, and I think it is 
important, is that we have had a fire hose running one way for 
about 4 years where tremendous liquidity has come into the 
system through the issuance of corporate debt because interest 
rates are low. It is a policy issue. That is about to reverse. 
You are not going to see that. And you are going to see 
potentially the other way.
    And that is why we need the ability to have a functioning 
market to balance when the liquidity runs the other way, 
because issuing corporations are not going to buy back their 
debt.
    Mr. Hollingsworth. Right.
    Mr. Kruszewski. It is going to need to be replaced.
    Mr. Hollingsworth. And just one final point on that. When 
you think about crises, and especially crises where significant 
price drops are very acute, I don't think about there being too 
much liquidity in those moments.
    In fact, I think about there being too little. A ready 
number of sellers and too few buyers and too few opportunities 
to offload it. That is what accounts for gaps downward in 
price.
    So when my friend says these crises may be on account of 
too much liquidity, I think the significant constraint in that, 
especially in this momentary passing of crises, is often too 
little liquidity and an inability to find enough ready-made 
buyers or sellers. Is that generally the concept of what 
happens in the middle of a crisis?
    Mr. Kruszewski. You can argue that too much liquidity goes 
into the asset and there is not enough liquidity to buy it 
back.
    Mr. Hollingsworth. Right.
    Mr. Kruszewski. So there is--liquidity is a funny thing.
    Mr. Hollingsworth. Yes.
    Mr. Kruszewski. And I would just say that if we were 
sitting here today with 2 percent GDP growth, not even 2 
percent GDP growth, and we were debating how to put market 
structure and regulations in place to drive economic growth, to 
get jobs going, and to do a number of things, the Volcker Rule 
would have no chance of passing under that basis. And that is 
why I sit here today is that for that same reason it needs to 
be repealed.
    Mr. Hollingsworth. Right. Thank you so much. I appreciate 
it.
    I yield back the balance of my time.
    Chairman Huizenga. Will the gentleman yield to the Chair?
    Mr. Hollingsworth. I will.
    Chairman Huizenga. All right. Because I want to actually 
amplify this, and Professor Whitehead, I am curious because as 
I was writing down, and I think Mr. Kruszewski had a figure of 
how many points increase that he thought that Volcker was 
costing in this environment, but I can't recall exactly what 
that number was.
    But the real question I have is what happens when interest 
rates go up? And what is going to happen? Is the Volcker Rule 
going to cause an even tighter situation?
    Mr. Whitehead. Well, that is the concern, that the Volcker 
Rule, because of the pullback from making a market, sort of 
secondary liquidity, is going to cause investors to be more 
reluctant to invest because they are not quite sure where to 
offset.
    It is the point that Mr. Kruszewski was just making a few 
moments ago. And as a result the cost of raising capital will 
go up as well. Not knowing what the risk is that I am going to 
take as an investor, I am going to expect a little bit more in 
anticipation of the risk of not being able to sell.
    Chairman Huizenga. All right. The gentlemen's time has 
expired.
    With that, the Chair recognizes the gentleman from 
California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. Mr. Chairman, as we explore the Volcker Rule, 
we have five excellent witnesses here, but I would like to 
bring to the attention to the subcommittee four witnesses who 
aren't here.
    The first is President Barack Obama who said, ``The Volcker 
Rule will make it illegal for firms to use government-insured 
money to make speculative bets that threaten the entire 
financial system and demand a new era of accountability from 
CEOs who must sign off on their firm's practices. Our financial 
system will be safer, and the American people are more secure 
because we fought to include this protection in the law.''
    Now, the fact that President Obama would support the 
Volcker Rule is not surprising. But here are three other 
witnesses. Our own chairman of the full Financial Services 
Committee, Chairman Jeb Hensarling, in March 2013 said, 
``Certainly we have to do a better job of ring-fencing, 
firewalling, whatever metaphor you want to use between an 
insured depository institution and a non-insured investment 
bank.''
    But the Speaker of the House was even more clear when he 
said, ``If you are a bank and you want to operate like some 
non-bank entity, like a hedge fund, then don't be a bank. Don't 
let banks use their customers' money to do anything other than 
traditional banking.'' That is the Speaker of the House in May 
2012.
    And finally, our Treasury Secretary Steve Mnuchin, ``I do 
support the Volcker Rule. I think the concept of proprietary 
trading does not belong in banks with FDIC insurance.''
    Perhaps it would be great to have Jeb Hensarling, Paul 
Ryan, and the Secretary of the Treasury here as witnesses to 
talk to us at this subcommittee hearing about the Volcker Rule.
    Mr.--will you pronounce your last name for me, sir?
    Mr. Kruszewski. When you stumble, I know the question is 
coming to me.
    [laughter]
    Ronald Kruszewski.
    Mr. Sherman. What?
    Mr. Kruszewski. ``Kruszewski.''
    Mr. Sherman. ``Kruszewski.'' Those who authored Dodd-Frank 
gave enforcement powers to five different agencies, each with 
primary oversight over a different segment of the industry.
    Does your company have multiple regulators? Are they 
enforcing the Rule differently? In your experience, have the 
regulators coordinated with each other effectively?
    Mr. Kruszewski. I think the regulators do the best they 
can. But the fact is that the Federal Reserve comes in and they 
have a certain view. And the OCC comes in and they have a 
different view.
    They have different mandates on top of it. So obviously, 
you would expect me to say nothing other than to have five 
different agencies come in and interpret and enforce a rule, as 
a businessman I don't think it is a good idea.
    So are they well-intended? Yes, but the enforcement tends 
to be a race to the bottom and which makes me have to take the 
most conservative viewpoint as to what the most conservative 
interpretation of Volcker may be.
    Mr. Sherman. Yes. You used the term, ``race to the 
bottom.'' In some spheres that means a race to lower and lower 
and lesser and lesser regulation. But I think you mean to say 
it is a race toward tougher and tougher regulation because you 
have to comply with all five.
    Mr. Kruszewski. I keep thinking in terms of liquidity 
availability, so I apologize.
    Mr. Sherman. Okay.
    Mr. Jarsulic, it has been argued that prohibiting 
proprietary trading will hurt our banks as they compete with 
banks overseas. The European Commission recommended a version 
of the Volcker Rule for its largest banks and the U.K. 
government is adopting a similar proposal that pushes risky 
trades into separately capitalized ring-fenced entities.
    How relevant are the competitive concerns given that our 
major competitors are moving in a similar direction?
    Mr. Jarsulic. I think that the movements on the part of 
foreign regulators suggest that they, too, recognize the risks 
that are posed by proprietary trading and the effects that they 
can have on the operation of a banking system. And so I think 
that there is a reasonable probability that the business models 
of their banks will be similar to the business model of ours.
    But even if that were not true, I think it is important to 
calculate the risks that these kinds of activities pose to a 
banking system. And what we are looking for is a stable, sound 
banking system that doesn't produce extreme financial events.
    And the fact that our banks aren't participating in 
activities that other banks are, doesn't weigh all that heavily 
against that consideration.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the Chair recognizes the gentleman from New 
Jersey, Mr. MacArthur, for 5 minutes.
    Mr. MacArthur. Thank you, Mr. Chairman.
    Mr. Jarsulic made a point at the beginning in his opening 
remarks that excessive risk-taking had caused terrible damage 
and harm to people and to our economy. I don't think any of us 
would disagree with that.
    We watched as millions of people lost their homes, and 
millions of others lost their fortunes. Shareholders lost their 
fortunes, even modest ones. And then taxpayers ended up footing 
the bill.
    And unfortunately, often those three people are one and the 
same: the homeowner; the shareholder; and the taxpayer. They 
got hammered three times, and $10 trillion of wealth or more, 
disappeared.
    I guess the question that keeps coming back to me is--I 
wasn't here in Congress when all this debate about Dodd-Frank 
went on and the aftermath of that--does this Rule, this 
particular Rule, address any of that?
    And so I want to start by asking you each just a yes-or-no 
question, starting with Mr. Blass. Yes or no, does the Volcker 
Rule, in your opinion, address the fundamental causes of the 
crisis that brought it about in the first place?
    Mr. Blass. It is not clear at all to us that it does. 
Certainly for our industry it misses the mark widely.
    Mr. MacArthur. Mr. Blass, I am sorry because you haven't 
spoken much so I am sorry to cut you off, but I have a few 
other questions. Just a yes or a no for this one if you would?
    Mr. Blass. It seems to miss the mark widely.
    Mr. Jarsulic. I believe it addresses a part of the things 
that led to the financial crisis.
    Mr. MacArthur. You guys should run for Congress.
    Mr. Jarsulic. No.
    Mr. MacArthur. Yes or noes are hard to answer here, too.
    Mr. Quaadman. The answer is no.
    Mr. Whitehead. I will do what professors never do, one 
word, no.
    Mr. MacArthur. Thank you. Okay.
    Professor Whitehead, I want to follow up with you on 
something that you also said. I have never been a banker. I ran 
an insurance company and then I was a private equity partner. 
So that is sort of my view of some of these things.
    It seems to me that it doesn't really matter if banks do 
smart or dumb things from my perspective, as long as they don't 
do too many of them with other people's money, or worse yet, 
with leveraged assets, because that creates certain issues.
    Do you think there is a tipping point at which too much 
risk, taking too much risk as a bank holding company, or worse 
yet, taking too much leveraged risk does create risk of failure 
that can get out of control?
    Mr. Whitehead. I would respond in two respects. The answer 
is, yes, I do think there is a point where there is too much 
risk, although that tends to be addressed through things like 
leverage ratios and capital requirements.
    And secondly, keep in mind, the Volcker Rule extends beyond 
banks. It covers all bank affiliates as well. So a lot of the 
testimony, a lot of the quotes that I have heard from folks who 
speak in support of the Volcker Rule speak to the depository 
institutions. And again, you want to keep in mind, we are 
talking about non-bank affiliates also.
    Mr. MacArthur. And I think you make an excellent point. It 
seems to me that the emphasis ought to be on leverage ratios 
and capital requirements because then instead of people in 
government trying to control very fluid markets, and they are 
fluid; I was a businessman for decades. Things change by the 
day, and business people respond by the hour.
    So instead of having bureaucrats try to figure all that out 
and control it, it seems to me we would be better off creating 
the limitations that stop us from hitting that tipping point 
instead of trying to decide who can do what in the broadest of 
categories.
    And this gets to some remarks that my friend from 
Connecticut was asserting before that we are trying to march 
towards and manage some optimal liquidity level.
    If it exists, it doesn't exist for more than a moment. And 
I am convinced it doesn't exist. It is fluid. The markets are 
fluid. And what is optimal liquidity today may be different in 
a month.
    And so I think we have to think about this differently, and 
I would advocate, along with those that are saying this rule 
doesn't come close to addressing the issue, it is time to re-
think how to manage risk without shutting down the providers of 
liquidity.
    And again, Professor Whitehead, I think you said in the 
beginning, capital markets have changed. I think about how I 
accessed capital at different points of my ownership of my 
company, and I think I accessed all manner of capital other 
than the pubic markets. Different things worked at different 
times. Let us not shut our banks down from participating in 
that.
    And with that, I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Massachusetts, Mr. 
Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman, and I thank the ranking 
member as well for holding this hearing. And I want to thank 
all of the witnesses here.
    Mr. Quaadman, you are here again. You spend more time 
before this committee than most of our members do.
    [laughter]
    But you are a very valuable witness, so we certainly 
welcome you again.
    Mr. Jarsulic, I read a study recently by the International 
Monetary Fund where the staff reported that 73 banks identified 
as systemically important by the Basel Committee on Banking 
Supervision; they said that these 73 banks account for two-
thirds of global bank assets.
    And according to the study, they said these 73 institutions 
pose significant management challenges and are very difficult 
to regulate and supervise and would be extremely difficult to 
resolve in an orderly manner in the event of a failure.
    And so I am just wondering if Volcker went away, if the 
Volcker Rule went away, how much more difficult do you think, 
with this financial system and proprietary trading that would 
be brought back, sponsorship of hedge funds and other risky 
activity, how difficult would it be then operating without the 
Volcker Rule, in terms of keeping these banks out of trouble or 
resolving them in a tough situation?
    Mr. Jarsulic. I think that the Volcker Rule is intended to 
be a preventative measure, that is, to lower the probability 
that these banks are going to need to be resolved. And so from 
that point of view, I think it is positive. It contributes to 
lowering the difficulties caused by excessive risk-taking.
    Mr. Lynch. There is the unwinding part, too, here that I 
want you to speak to. We have evidence from the London Whale 
trading incident. And it was extraordinary that JPMorgan was 
involved in that. And apparently a lot of the trading involved 
overseas affiliates in London, and I imagine that would occur 
on a fairly common basis.
    Mr. Jarsulic. Yes. I now see your question. Big 
organizations are--large bank holding companies are 
extraordinarily complex institutions. I think the Federal 
Reserve did a study of our larger banks and found that they 
often had subsidiaries in the thousands. And those subsidiaries 
are, of course, located across jurisdictions.
    And it has been the case, I think, in the past that a lot 
of trading activity has been located--for U.S. banks has been 
located in foreign jurisdictions, such as London.
    And so the more that you allow that kind of complex and 
potentially loss-generating activity that often creates 
contracts, obligations, that involve many institutions if you 
go across borders and legal institutions, it does increase the 
difficulty of unwinding an institution should it fail. And that 
it could make it a more protracted process.
    Mr. Lynch. I read a Reuters article recently that Goldman 
Sachs was still seeking a 5-year extension to conform with the 
Volcker Rule for about $7 billion worth of private equity 
investments.
    And if Goldman Sachs can't get rid of those illiquid 
assets, I think the average bank would have extreme difficulty. 
This is 6 years now that they have been holding on to those 
illiquid assets.
    Let me just ask you generally, the idea that we are going 
to have insured institutions, FDIC-insured institutions out 
there engaged in proprietary trading and higher risk activity, 
it seems like a moral hazard that you are insuring people and 
inducing them to engage in risky activity when you are going to 
end up holding the bag possibly if they begin to go under?
    Mr. Jarsulic. Yes, as long as you allow those kinds of 
activities inside an institution which is either insured as a 
commercial bank unit would be, or in the case of widespread 
calamity implicitly insured, although I think the argument is 
the Dodd-Frank Act reduced that implicit insurance 
significantly is quite strong, the more likely they are going 
to be able to engage in those kinds of activities, the greater 
the risk they produce, the more willing it will be for their 
counterparties and funders to help them engage in that kind of 
activity.
    Mr. Lynch. Thank you very much, Mr. Chairman. I yield back 
the balance of my time.
    Chairman Huizenga. The Chair recognizes Mr. Poliquin from 
Maine for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman, very much, I 
appreciate the time.
    And I thank all of you gentlemen for being here today.
    Mr. Kruszewski, I know I am not pronouncing it right but it 
is close enough. Do you know who I mean? Okay? Good. I would 
like to ask you a question if I may?
    Last December, on the 22nd, the Fed released a research 
paper entitled, ``The Volcker Rule in Market Making in Times of 
Stress.'' And in that report, it states, ``We document--i.e., 
the Fed staff--that the illiquidity of stressed bonds has 
increased after the Volcker Rule.
    ``Since Volcker-affected dealers have been the main 
liquidity providers, the net effect of these bonds are less 
liquid during times of stress due to the Volcker Rule.'' And 
they also talked about the performance of bonds during 
downgrades and so forth and so on.
    So my question to you, sir, is, do you agree, since you are 
in the business, that the Volcker Rule, in fact, has caused 
this problem? Did you agree with the findings of that report?
    Mr. Kruszewski. Yes.
    Mr. Poliquin. Okay. What do you think that means? What are 
the implications for our economy as a result of concluding that 
the Volcker Rule does cause illiquidity during times of stress?
    Mr. Kruszewski. Again, as I have said in my written and 
oral testimony, and I will say again, to the extent that the 
Fed is correct, and I believe they are correct that there is 
less liquidity, especially for these smaller bond issues. In 
very simple terms that just equates to higher cost to capital 
for our companies and our economy. And it is just that simple.
    So if you cannot--buyers are going to demand more 
compensation in terms of bonds. That means higher interest 
rates for the issuing company. That is higher cost to capital, 
less money for jobs and development.
    Mr. Poliquin. So specifically at a time of stress in the 
economy when business is poor and rates are already rising, you 
are saying this could cause rates to go up even further, and 
further choke off capital to small and medium size companies 
that are desperately in need of that capital?
    Mr. Kruszewski. I would not equate that report to rising 
interest rates per se. I think that is an economic phenomenon 
and that is what the Fed does. What they are saying, as I read 
that report, is that they see the illiquidity in times of 
stress.
    And what that means is, so do the people who buy those 
bonds see the illiquidity in times of stress. There will not be 
any buyers. And therefore, to compensate for that risk, they 
will increase the rates.
    Mr. Poliquin. Got it.
    Mr. Quaadman, if I may expand upon this please? Do you 
think as a result of this conclusion by the Fed that many of us 
are in agreement with, that that could pose the amalgamation of 
this problem on different parts of the economy--could pose 
systemic risk to the economy?
    Mr. Quaadman. I think it is definitely causing a drag on 
growth. The march towards stability without also having pro-
growth measures in place has caused that drag.
    I do think, as I mentioned before, too, as we are seeing 
treasurers being forced to more and more put their cash into 
U.S. Treasuries, it is actually concentrating risk into another 
part of the financial sector.
    Mr. Poliquin. Mr. Whitehead, would you like to jump in here 
and comment on this, sir, before I ask another question?
    Mr. Whitehead. I think it is really the same point, which 
is as investors who are concerned about liquidity assess 
whether or not to make an investment, you would expect them to 
receive a higher return. And that has a real Main Street 
effect. It means the cost of raising capital goes up and that 
has a knock-on effect to what the businesses can do.
    Mr. Poliquin. If a company has a problem dealing with the 
Volcker Rule because it is a 1,000-page rule where you are 
reporting to five different agencies, as you mentioned, sir, 
and that book of business or that part of your book of business 
isn't performing as you expect it to, Mr. Kruszewski, could you 
also comment on what other types of activities that might be 
riskier might a bank be involved in as a result of this part of 
their book of business not performing?
    Mr. Kruszewski. I am not sure. I will try to answer your 
question. I believe that first of all, Stifel does not engage 
in proprietary trading. It is not something that is central to 
our business model. I am not talking my own book here.
    What I am suggesting is that the five agencies and the 
interpretation of the Rule, which is very complex, results in 
it being very difficult to make effective markets, especially 
in times of stress. What other firms are doing to compensate 
for that, I am not sure.
    Mr. Poliquin. Thank you, Mr. Chairman. My time has expired.
    And thank you, gentlemen, very much.
    Chairman Huizenga. The gentleman's time has expired.
    With that, I would like to thank our witnesses today for 
your testimony. This has been, I think, a very helpful 
conversation.
    And without objection, I would also like to submit for the 
record a letter from the National Venture Capital Association.
    Without objection, it is so ordered.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Mrs. Maloney. Thank you. May I join you in thanking the 
witnesses?
    Chairman Huizenga. Please.
    Mrs. Maloney. I also want to thank you all for your 
testimony on what I think is a critical issue. And I wanted to 
just end with the quote that Mr. Hollingsworth said, ``If you 
think our problems are bad, wait until you see our solutions.''
    But the problem we tried to address with Volcker was the 
financial crisis that ended up costing this country $16 
trillion to $18 trillion, depending on what study you look at, 
thousands--millions of jobs and millions of homes.
    And basically Volcker just says that banks should not 
gamble with their customers' money, especially when that money 
is insured by the FDIC and backed up by the taxpayers. And so--
    Chairman Huizenga. And somewhere in there is a thank you to 
our witnesses?
    Mrs. Maloney. I did say--
    [laughter]
    I did say thank you, but--
    Chairman Huizenga. Okay. Well, with--
    Mrs. Maloney. --I do thank you. Thank you very, very much, 
really.
    Chairman Huizenga. With that, I again thank our witnesses, 
and our hearing is adjourned.
    [Whereupon, at 12:08 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             March 29, 2017
                             
                             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]