Volcker Rule fight drags on

The Volcker Rule may be the law of the land, but that does not mean critics won’t stop pushing to tweak it.

Industry advocates and skeptical Republicans were fiercely critical of the major Dodd-Frank provision at a House Financial Services Committee hearing Wednesday, but it appeared the thrust of the criticism was aimed at altering the regulation as it exists, rather than renewing efforts to scrap it altogether.

On that front, Democrats appeared willing to discuss tweaks regulators could adopt to fix apparent problems with the rule, suggesting some middle ground on what has long been a contentious debate. That is, if critics can seek out changes without, as the panel’s top Democrat put it, “destroying the Volcker Rule.”

“We should be focused more on what we can do to implement Volcker … but at the same time deal with any unintended consequences,” said Rep. Maxine Waters (D-Calif.), the ranking member of the panel. “We’re willing to do that … let us focus on what we can do to make sure we deal with some of the issues.”

Three and a half years after the Dodd-Frank financial reform law was enacted, debate over the Volcker Rule is running as hot as ever, even as regulators supposedly finished work on the provision at the end of 2013.

The financial industry remains critical of the provision, which cracks down on risky, but oftentimes profitable business activity by banks. But at the same time, those skeptics acknowledge the rule is in place, and likely not going anywhere.

Ken Bentsen, the president and CEO of the Securities Industry and Financial Markets Association, told lawmakers Volcker was “a policy response in search of a problem,” and noted that other nations have not yet adopted similar restrictions.

But at the same time, he said his industry group had no plans to mount a legal challenge to the regulation, and instead was focused on making it work as best as it can.

“It is the law of the land and our members are moving forward to comply with it,” said Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association.

After years of work, five of the nation’s financial regulators finally put in place regulations implementing the Volcker Rule in December. Ever since Dodd-Frank was enacted in 2010, regulators have had their hands full getting Volcker in place. The new ban on risky profit-seeking activity on banks was highly contested during the debate, and subject to intense scrutiny from the industry in the rulemaking process.

Shortly after the rule was finalized, banks quickly found an apparent problem with rules. A niche security often packaged into collateralized debt obligations and held by small banks called trust-preferred securities were not exempted from the new rule. Banks threatened legal action if regulators did not address the issue, as it could force smaller banks not aimed at under Volcker to face millions of dollars in losses as they unloaded the CDOs.

Lawmakers in both parties pushed for a fix, either by pressuring regulators or proposing legislation. One day before Wednesday’s hearing, regulators rolled out an interim final rule addressing the issue. Members of both parties praised the fix, but industry witnesses had already identified another issue with the rule. Several witnesses said the fact that regulators did not carve out collateralized loan obligations from the ban, which again could subject banks of all sizes to losses as they unload that security.

Lawmakers expressed some openness to having regulators revisit that issue as well. But while both sides struck a constructive tone on some specific matters pertaining to Volcker, the broad criticisms and defense of the measures also remained potent.

For Republicans, the Volcker Rule is an unnecessary restriction on the financial sector that will bury banks of all sizes in onerous restrictions and damage markets.

“Like most of the other 400-plus rules of Dodd-Frank, the Volcker Rule is aimed at Wall Street, it hits Main Street, and regrettably the poor and downtrodden amongst us become collateral damage,” said Chairman Jeb Hensarling (R-Texas).

GOP lawmakers also accused regulators of failing to properly conduct an economic analysis of the impact of the rule before putting it in place, a common conservative critique of several efforts to implement Dodd-Frank.

And they pointed to the issue with trust-preferred securities as not a niche error, but emblematic of the broader problems with the rule itself.

“This issue was not even part of the rule,” said Rep. Shelly Moore Capito (R-W.Va.). “This just show you the uncertainty around the rollout.”

Meanwhile, Democrats continue to tout Volcker and Dodd-Frank as critical safeguards needed after the historic financial collapse, and dismissed industry concerns as primarily driven by fear of losing rich profit margins.

“Just because something makes Wall Street a lot of money does not mean it’s a good thing for the American people,” said Rep. Stephen Lynch (D-Mass.).