The Volcker Rule will stifle job creation at a critical time for the economy because it impairs liquidity, reduces access to credit, restricts trading for banks with a special impact on community banks, and, most damningly, means small and start up businesses – the key job creators – receive less access to critical capital.
That was the overall tone of testimony heard by the House Committee on Financial Services on Wednesday from key bankers, traders, and industry associations -- the first in a series of hearings on how Volcker affects job creators.
The Dodd-Frank Act’s Volcker Rule prohibits U.S. bank holding companies and their affiliates from engaging in "proprietary trading" and from sponsoring hedge funds and private equity funds.
The Volcker Rule, hailed by supporters as a victory for regulators and by detractors as a victory for $1,000-an-hour Wall Street attorneys, jacks up compliance costs in the financial sector, leads to higher fees for consumers, and puts the American businesses at a competitive disadvantage, witnesses testified.
The idea, supporters say, is to prevent speculative, excessively risky activity by insured depository institutions.
But the reality, business leaders say, is that drawing a line between proprietary trading and permissible market-making activity is difficult to the point of impossible, which makes the rule destructive to capital and financial markets.
"SIFMA and our members still believe the Volcker Rule is a policy response in search of a problem and we remind the Committee that no other country has adopted anything at all similar to the Volcker Rule," said Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA) and a former congressman from Texas. "At the level where the regulation impacts real businesses and investors in the real economy, time and experience have shown that it is, in fact, exceedingly complex."
"Those who have grappled with the Volcker Rule at any level deeper than that of a media sound bite know that balancing the statutory mandate to both prohibit and permit certain activities and investments in a way that does not harm the capital markets and the businesses, governments and investors who rely on those markets, is a very serious business and horribly complex," Bentsen said.
Bentsen told the committee that there is a strong likelihood that significant issues may arise in the coming weeks or months that are simply not on the radar screen today.
"Failure to address this could result in more compliance burdens that would undermine activities beneficial to the economy such as market making and hedging," Bentsen said.
Dave Robertson, a partner with Treasury Strategies, Inc., told the committee that the rule will have impact far beyond the financial sector, hurting small businesses and start-ups by strangling the economy.
Like most of the witnesses testifying, Robertson said provisions of the Volcker rule and its intended protections are necessary, but the law as written and interpreted is harmful.
"These concerns are very serious and very real, and the Volcker Rule's impact will resonate throughout our economy," Robertson told the committee Wednesday. "As the banking sector becomes less able to provide American businesses both liquidity and access to credit, American businesses will be compelled to reserve more idle cash, and tap more volatile and expensive forms of credit. These costs will ultimately be borne by ordinary Americans in the form of more expensive products, fewer jobs and decreased dividends."
Already some legislators have pushed to modify Volcker. House Financial Institutions and Consumer Credit Subcommittee Chairman Shelley Moore Capito, R-W.Va., and HFSC Chairman Jeb Hensarling (R-Texas) introduced in December a bill to fix a provision in the Volcker Rule that harms community banks.
"For more than three years, those who support the Dodd-Frank Act assured community banks they would not be harmed by the Volcker regulations. Then, in the dark of night, suddenly Washington regulators at the last minute changed the rules and included these products in the Volcker regulations with no time for public comment or review," Hensarling said. "That’s unfair and it will do nothing but undermine the ability of small businesses that create jobs and other bank customers to receive loans from their financial institutions."
On Dec. 10, 2013, the final Volcker Rule was approved by Washington regulators. While most community and regional banks are not engaged in activities covered by the Volcker Rule, many made investments in the past in the debt tranches of collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS) in order to have access to additional forms of capital.
"Community banks were reassured that the Volcker Rule wouldn’t affect them, as they pose no conceivable systemic risk, but they have quickly found out otherwise as affected institutions face millions of dollars in losses that will undermine their ability to serve their customers and communities. ABA has been working diligently to find a solution to this matter through regulatory or legal channels and we will continue to do so," noted Frank Keating, President and CEO of the American Bankers Association.
Congresswoman Maxine Waters, D-Calif., a committee member, however, said that the Volcker Rule is critical for ensuring taxpayer dollars are no longer used to protect banks from risky trading losses.
"(Volcker) will protect the U.S. economy from suffering another debilitating financial crisis and will ensure taxpayers are never again asked to rescue failed financial firms," she said during the hearing.