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Regulators defend 300-page 'Volcker Rule' on risky trading
Financial regulators were caught in a partisan tug-of-war Wednesday as they defended a 300-page regulation required by the Wall Street reform law.
Republicans on the House Financial Services Committee chided regulators and said their attempt to implement the "Volcker Rule" is overly complex and threatens the health of markets and the economy. Committee Chairman Spencer Bachus (R-Ala.) said the regulation would be a "self-inflicted wound" on the nation’s financial system.
Democrats, meanwhile, pushed regulators to make sure the rule curbs risky activity and told them to resist calls from critics to adopt a slower pace.
"Delay here is a stalking horse for opposition for most people," said Rep. Barney Frank (D-Mass.), the ranking member of the panel.
Regulators were careful not to take sides, and assured lawmakers that their work is far from done. They noted that they are waiting for substantial public input before finalizing the Volcker Rule, the centerpiece of the Dodd-Frank financial reform law.
The Volcker Rule is aimed at prohibiting banks, whose deposits are insured by the government, from engaging in risky trading activity that could put those guarantees at risk. Named for former Federal Reserve Chairman and Obama adviser Paul Volcker, the rule bans "proprietary trading," which is when a bank trades with its own funds for profit, as well as certain relationships between banks and riskier financial institutions like hedge funds.
But the fundamental tension surrounding the rule is whether regulators will balance that ban with another, competing part of the rule. While the rule prohibits proprietary trading, it is not intended to ban "market-making," which is when a bank trades in order to keep a market flowing and accessible.
The nation’s top financial regulators — the Commodity Futures Trading Commission (CFTC), Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC) and Office of the Comptroller of the Currency — have been jointly tasked with figuring out how to codify that distinction. So far, it seems to be a complicated matter.
The original proposed rule, released in October, ran hundreds of pages and asked roughly 1,300 questions of the public.
GOP lawmakers cited the hefty size of the proposed rule as proof that it is unworkable.
"The regulators have also been a bit overzealous ... making a terrible rule even worse," said Rep. Michael Grimm (R-N.Y.).
Bachus, who said the rule should be repealed, contended that it would often require a regulator to determine the motive behind a certain trade, whether a trader is seeking to earn a profit for the bank or ensuring a well-oiled market.
"You're asking regulators to determine motive and intent. That is tremendously difficult and problematic," he said. "Every trader is going to need a psychiatrist and a lawyer sitting next to them."
Democrats also criticized regulators for their lengthy work. Rep. Carolyn Maloney (D-N.Y.) said the idea behind the rule has been made needlessly complicated by regulators trying to accommodate the industry.
“The regulators have taken a simple, clear goal and made it overly complex,” she said. “Chairman Volcker has said identifying proprietary trading should be simple. You know it when you see it.”
Regulators defended the complexity of their original proposal, saying it was vital that they receive substantial public input on the weighty subject, and vowed to remain flexible in adapting the rule going forward before it takes effect in July.
Gary Gensler, chairman of the CFTC, said that public response will be “critical” to the successful rollout of the rule and that regulators would not rush it.
“We’re committed to getting the rules right, balanced and not against a clock,” he said.
Daniel Tarullo, a governor of the Federal Reserve, contended that the slew of questions actually is a positive attribute, but also an indication of the disagreements that persist between regulators.
“Part of what questions do is reveal to the public what we’re thinking about,” he told lawmakers. “They do actually serve a transparency function.”
GOP lawmakers also criticized the rule by pointing out that other nations have not followed suit with similar restrictions. As a result, U.S. institutions will be at a disadvantage compared to their global counterparts, they argued.
On this front, they received some backing from one regulator. John Walsh, the acting comptroller of the currency, agreed in his opening testimony that U.S. banks will suffer a “competitive disadvantage” to foreign banks when the Volcker Rule is in place.
Following up the regulators, industry groups and experts heaped scorn on the rule. A representative for the U.S. Chamber of Commerce told lawmakers that the Volcker Rule would make it harder for businesses to raise cash.
Douglas Elliott, an economic fellow at the Brookings Institution, called it “fundamentally flawed,” adding that it would “do considerably more harm than good for the economy.”
However, a representative of the group Americans for Financial Reform argued the Volcker Rule is a vital safeguard for the financial system, ensuring that American taxpayers no longer effectively guarantee risky trading done by insured depository institutions.
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