U.S. regulators implementing Volcker Rule curbs on banks’ trading have formed an interagency group to coordinate their efforts and reduce chances for companies to play for advantage by exploiting differences.
Top officials from the Federal Reserve, Federal Deposit Insurance Corp. and three other agencies outlined plans for the group in statements at a House Financial Services Committee hearing in Washington today. The regulators are testifying amid criticism from Republican committee members that the rule adopted Dec. 10 will stunt economic growth and job creation.
“This interagency group will be instrumental in coordinating the agencies’ interpretations and implementation of the final rule on an ongoing basis,” Securities and Exchange Commission Chairman Mary Jo White said in her remarks. She is appearing at the hearing alongside Fed Governor Daniel Tarullo, FDIC Chairman Martin Gruenberg, Comptroller of the CurrencyThomas Curry and Mark Wetjen, acting chairman of the Commodity Futures Trading Commission.
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Formation of the regulators’ group, which held its first meeting Jan. 23, is a response to complaints from industry groups and lawmakers over the complexity of the rule itself and potential inconsistencies among the five agencies responsible for the Dodd-Frank Act measure.
“The Volcker Rule, I believe, remains a solution in search of a problem,” Representative Jeb Hensarling, the Texas Republican who leads the Financial Services Committee, said in an opening statement faulting the rule’s cost and impact on markets. “I’m unaware of any economist or regulator who’s been able to quantify precisely the Volcker Rule’s benefits.”
The trading restrictions named for former Fed Chairman Paul Volcker were among the most contentious measures arising from Dodd-Frank, the law passed by a Democratic-led Congress in response to the 2008 credit crisis. Republicans who took control of the House in 2012 elections have targeted the rules -- designed to stop banks from speculating with their own capital and cut investments in private-equity and hedge funds -- as part of a broader attack on the regulatory overhaul.
The new interagency group will address implementation issues on an on-going basis and provide additional guidance or clarity as necessary, Gruenberg said in his statement. At the first meeting, they discussed potential methods of coordinating responses to questions about approaches to supervising and examining banks, White said.
“To expect a coherent coordinated implementation and enforcement process is to expect the impossible,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an interview yesterday. Falling back on an interagency group “is the best they can do.”
Though the industry still expects different agencies to see the rule in different ways, bankers are likely to resist taking advantage of whatever agency has the lightest regulatory touch, Petrou said.
“This type of cooperation is to be commended and is critical to ensure that the agencies’ implementation of the Volcker Rule is strong, coordinated and effective,” Representative Maxine Waters of California, the Financial Services Committee’s top Democrat, said in a statement.
Wetjen said his agency is considering whether to take additional steps, including whether to adopt formal procedures for enforcement of the rule. He said he has directed agency staff to consider adoption of such procedures and to make recommendations in the near future.
The agencies have already addressed one industry complaint. On Jan. 14, the regulators moved to shield some collateralized debt obligations backed by trust-preferred securities after community banks said they would be harmed. The regulators adopted the revision after the American Bankers Association sued claiming that the restrictions would cost smaller banks $600 million in losses.
Representatives of large banks have asked regulators to also amend the Volcker Rule for its limitation of senior debt securities issued by collateralized loan obligations. The regulators’ exemption narrowly addressed CDOs, not the banking industry’s related complaint that Volcker Rule could force losses on certain collateralized loan obligations.
Some of the distinctions between allowable and banned trades could be worked out in the implementation, Tarullo said.
“While the final rule issued by the agencies articulates standards for making those distinctions, those standards will be given meaning as they are applied by banking entities and supervisors on the field,” he said.
At the Financial Services panel’s first hearing on Volcker Rule implementation last month, Hensarling said the rule would slow the economic recovery from the 2008 credit crisis.
The rule’s wider effect on the economy -- including whether it will hurt job-creating investments -- is out of the hands of the government and banks, Curry said.
“Banking entities will have to discontinue some activities and investments, but the impact of those changes on the overall market will depend in large measure on factors that neither banking entities nor the agencies control,” he said.
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