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Regulators defend Volcker rule proposal

by Ira Teinowitz In Washington | Published January 18, 2012 at 5:39 PM

Regulators on Wednesday defended their proposal to implement the Volcker Rule's ban on proprietary trading by banks, telling a congressional committee that fears about the rule's potential costs and negative impact on the economy are vastly overstated and based on wrong assumptions.

Conceding that the nearly 300-page Volcker rule proposal may have been "overly generous" in asking for comment on 1,300 questions, top officials of the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency told a joint meeting of two panels of the House Financial Services Committee that the concerns are based on two mistaken assumptions. The first is that regulators won't set exemptions to the rule wisely and, second, that the proprietary business will go overseas if banks must stop trading for their own account. In fact, the regulators said other U.S. players are likely to step in.

"I think if the rule is implemented properly-and focused on making sure that the underwriting market-making functions are able to proceed in a productive fashion -then we shouldn't see that kind of impact," said Federal Reserve Governor Daniel K. Tarullo. "Might we see some shifts from one firm to another? I think we might. But if we do underwriting and market making right, I think that the capital flows are going to be preserved."

SEC Chairwoman Mary Schapiro said regulators are going to set principals and compliance requirements, but don't intend to examine every single transaction.

"We aren't going to look trade by trade," she said.

All the regulators suggested that the number of questions asked and the length of the Volcker Rule proposal were intended to showcase early and clearly any potential problems so the final rule could be improved.

Tarullo also said regulators would look at any alternatives to simplify their proposal. The Volcker proposal would ban banks from engaging in proprietary trading, while allowing them to engage in market making activities on behalf of clients. It puts much of the onus on banks to determine whether a particular transaction is proprietary and will require them to establish internal compliance procedures.

The Subcommittee on Capital Markets and Government Sponsored Enterprises and the Subcommittee on Financial Institutions and Consumer Credit also heard warnings from the U.S. Chamber of Commerce, the Institute of International Bankers, the Securities Industry and Financial Markets Association and other industry groups of dire repercussions if the rule is imposed.

Scott Evans, executive vice president of TIAA-CREF, which is an insurer that owns a small thrift, told the committee that the rule could bar it from investing in private equity funds.

"Private equity investments are an integral part of our long-term investment strategy. These investments are widely used by insurers to diversify our portfolios and enable us to deliver on the long-term commitments that we have to our participants," he said.

Douglas Peebles, chief investment officer and head of fixed income for AllianceBernstein LP, and testifying on behalf of SIFMA, warned the proposal "could have devastating effects on fixed-income markets that exhibit intermittent liquidity."

Republican committee leaders also questioned the impact of the rule, suggesting that it could significantly raise costs and send business overseas, cutting American jobs.

"I think Section 619 [the Volcker Rule] was a mistake. None of us want to go through what we did in 2008 and 2009 but proprietary trading was not one of those mistakes," said Rep. Spencer Bachus, R-Ala., chairman of the full Financial Services Committee. "What we are hearing from not only companies, but consumers, is that this rule will threaten the United States and its financial markets, its capital markets."

Rep. Ed Royce, R-Calif., said that other countries won't be following the U.S. in implementing the Volcker Rule. "What has become clear in the months since passage is that neither Asia nor Europe are on board and we go it alone," he said.

Democrats, among them Rep. Barney Frankof Massachusetts, co-sponsor of the Dodd-Frank Act, defended the Volcker Rule, suggesting that opponents are complaining both that the rule goes too far and that the rulemaking is too complicated because of regulators attempts to ensure it doesn't go too far.

He also dismissed worries that regulators would be too strict and overregulate with harsh "vindictive regulatory action."

"My question there is, in what universe have people been living in which the problem has been that financial regulators have been too tough, too harsh, too vindictive, have extracted too great a penalty for errors of misunderstanding?" he asked. "I think the record is very clear that our regulators -- over time, both parties-have-if anything . . . underregulated and underapplied the rules."

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Tags: Daniel Tarullo | Mary Schapiro | SEC | securities and exchange commission | Volcker Rule

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