Republicans shred the Volcker Rule
Republican congressmen vented Wednesday that a signature aspect of President Barack Obama’s financial reform has become too costly and complex to enforce.
The so-called “Volcker Rule”— named after former Federal Reserve Chairman Paul Volcker — would restrict banks from trading for their own accounts, a move intended to prevent them from making risky bets with deposits insured by the government.
At a joint House Financial Services subcommittee hearing, Rep. Spencer Bachus (R-Ala.) attacked the rule as being a “self-inflicted wound” for the entire economy, warning that Wall Street jobs could migrate abroad to Canada after the rule starts to go into effect in July.
The Volcker Rule asks the government to distinguish between banned “proprietary trading” and legitimate “market making,” or trades that smooth out the process of buying and selling investments like stocks and bonds.
Federal regulators recently issued a 300-page proposal for enforcing the rule that contains more than 1,300 questions, an effort easily interpreted as revealing the challenge of spotting the newly forbidden trades.
“Making such distinctions will be difficult, if not impossible,” said Bachus, chairman of the Financial Services committee.
Rep. Michael Grimm (R-N.Y.) ripped into the regulators who appeared at the hearing, dubbing them “overzealous” bureaucrats who have “found creative ways to make a terrible rule even worse.”
Rep. Barney Frank (D-Mass.) defended the proposal drafted by the Federal Reserve and the Securities and Exchange Commission, among other regulators who appeared at the hearing.
The exhaustive draft tries to address worries by banks that the Volcker Rule might penalize market-making trades and cause liquidity to dry up, he argued.
“You are guilty of trying to accommodate some of the concerns that financial institutions have,” concluded Frank, a namesake of the 2010 Dodd-Frank financial reform that features the rule.
Democrats vying to succeed Frank, who has announced plans to retire at the end of his term as the committee’s ranking member, did raise questions about the impact of the measure.
Rep. Carolyn Maloney (D-N.Y.) fretted that the rule was “overly complex,” while Rep. Maxine Waters (D-Calif.) sought confirmation that regulators are addressing industry anxieties without compromising the rule’s intentions.
Maloney asked whether the government had access to enough data to identify which trades were appropriate and which would be illegal.
The panel of witnesses acknowledged that, for the moment, the government was flying blind.
“When we start getting that information, we will be in substantially better positions to draw the kind of distinctions that you are talking about,” answered Daniel Tarullo, a Federal Reserve governor.
Republican lawmakers pressed on whether regulators had fully considered the costs for assembling the data and enforcing a rule developed in response to the 2008 financial crisis.
SEC Chairwoman Mary Schapiro told the committee that a study commissioned by the Securities Industry and Financial Markets Association estimated it could cost bond investors $90 billion-$315 billion.
“It’s not clear to me how well grounded that study is,” Schapiro said. “Costs can be easy to identify.
“Benefits, as you know, can be much harder to quantify.”
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