Bloomberg News

U.S. Regulators Face Grilling on Volcker Rule, Dodd Frank

December 08, 2011

(Updates with comments from Johnson in fifth paragraph, Shelby in 14th paragraph and Tarullo in 21st paragraph.)

Dec. 6 (Bloomberg) -- Regulators implementing the Dodd- Frank Act are facing questions from U.S. lawmakers over progress on required rules, including provisions of a proposal to bar Wall Street firms from proprietary trading.

The Treasury Department, Federal Reserve and other agencies have spent more than a year drafting rules required by the law, from new regulation for the $708 trillion global swaps market to tools for winding down failing financial firms and enhanced supervision of the largest and most complex companies.

“The ultimate shape of both individual requirements and overall reform is becoming clearer by the week,” Deputy Treasury Secretary Neal Wolin said in remarks prepared for the Senate Banking Committee hearing. “Increasingly, financial firms are in a position to adjust their business models in anticipation of final rules.”

Regulators are working on hundreds of rules required by Dodd-Frank, Congress’s response to the 2008 credit crisis that forced lawmakers to approve bailouts for financial firms including Goldman Sachs Group Inc. and JPMorgan Chase & Co. The Senate panel called regulators to testify on the progress as agencies are struggling to meet deadlines amid budget cuts and strained resources.

‘Timely Resolution’

Senator Tim Johnson, the South Dakota Democrat who leads the Banking Committee, called for a “timely resolution” to outstanding rulemakings such as the Volcker rule, which would ban proprietary trading by banks that benefit from deposit insurance and Fed borrowing privileges.

“I recognize that these rulemakings are difficult, but this is the time when tough decisions have to be made by our regulators,” Johnson said in his opening remarks.

Regulators have sought increased resources from Congress, which has been caught between House Republicans working to cut spending and Senate Democrats looking to protect the law.

Mary Schapiro, chairman of the Securities and Exchange Commission, said her agency won’t be able to do its job without a bigger budget.

“If the SEC does not receive additional resources, many of the issues highlighted by the financial crisis and which the Dodd-Frank Act seeks to fix will not be adequately addressed,” Schapiro said in prepared testimony, saying her agency “desperately” needs new specialized staff and technology, including a new rule to collect trading data from hedge funds.

‘Wringing Efficiencies’

The new Dodd-Frank duties “are so significant that they cannot be achieved solely by wringing efficiencies out of the existing budget,” Schapiro said in her statement.

The reach and scope of Dodd-Frank rules will affect financial firms including Goldman Sachs and JPMorgan. Both have already shuttered proprietary trading desks in advance of a new rule aimed at banning the practice in banks.

A draft of the Volcker rule, released by regulators in October, has drawn criticism from both Democratic and Republican lawmakers as well as banks.

The proposal, named for former Fed Chairman Paul Volcker, would ban banks from making trades for their own accounts while allowing them to continue short-term trades for hedging or market-making. Banks also would face limits on investments in hedge funds and private-equity funds.

Senator Richard Shelby of Alabama, the top Republican on the Banking Committee, criticized the draft of the rule for lacking both clarity and the sign-off from the Commodity Futures Trading Commission, which chose not to endorse it.

“The proposal to implement the Volcker rule has been marred by misconduct, ambiguity and interagency discord,” Shelby said.

Trade Groups

A coalition of U.S. and international banking trade groups wrote to regulators on Nov. 30 requesting a delay in the comment period for the draft version of the rule, citing members -- which include Bank of America Corp. and Citigroup Inc. -- that are still trying to understand the proposal.

“Our members are deeply concerned about the potential impact of the proposal on capital formation, markets and liquidity for a range of asset classes and on the safety and soundness of banking entities and the businesses in which they engage,” the Financial Services Forum, Securities Industry and Financial Markets Association, Financial Services Roundtable, American Bankers Association and Institute of International Bankers wrote in the letter.

The Volcker proposal is “the result of months of intensive study and analysis by the agencies,” John Walsh, acting comptroller of the currency, said in his opening statement. The public comment period closes Jan. 13.

Global Firms

The Federal Deposit Insurance Corp., which was given increased responsibilities to resolve failing financial firms deemed a systemic risk, is working with overseas regulators to coordinate the resolution process for firms with operations abroad, said Martin Gruenberg, the agency’s acting chairman.

“In the wake of the financial crisis, there has been an increased international awareness of the need for greater inter- jurisdictional cooperation in the planning for resolution of specific cross-border institutions,” Gruenberg said in his opening remarks.

Fed Governor Daniel Tarullo said banks need to build sufficient reserve capital to avert taxpayer-funded bailouts similar to the $700 billion Troubled Asset Relief Program.

Dodd-Frank requires the Fed to impose stricter capital standards for U.S. banks with total assets of $50 billion or more. In addition, the Basel Committee is establishing a surcharge for global banks with a large systemic footprint.

“The best way to avoid another TARP is for our large regulated institutions to have adequate capital buffers, reflecting the damage that would be done to the financial system were such institutions to fail,” Tarullo said in testimony to the panel.

--With assistance from Jesse Hamilton and Craig Torres in Washington. Editors: Maura Reynolds, Gregory Mott

To contact the reporter on this story: Phil Mattingly in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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