[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                      EXAMINING THE IMPACT OF THE 
                  VOLCKER RULE ON MARKETS, BUSINESSES, 
                      INVESTORS, AND JOB CREATION 

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                AND THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               ----------                              

                            JANUARY 18, 2012

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-95








   EXAMINING THE IMPACT OF THE VOLCKER RULE ON MARKETS, BUSINESSES, 
                      INVESTORS, AND JOB CREATION












                      EXAMINING THE IMPACT OF THE
                  VOLCKER RULE ON MARKETS, BUSINESSES,
                      INVESTORS, AND JOB CREATION

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                AND THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 18, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-95

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    January 18, 2012.............................................     1
Appendix:
    January 18, 2012.............................................    77

                               WITNESSES
                      Wednesday, January 18, 2012

Carfang, Anthony J., Founding Partner, Treasury Strategies, Inc., 
  on behalf of the U.S. Chamber of Commerce......................    49
Elliott, Douglas J., Fellow, The Brookings Institution...........    53
Evans, Scott, Executive Vice President, President of Asset 
  Management, TIAA-CREF..........................................    51
Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission (CFTC)..............................................    12
Gruenberg, Hon. Martin J., Acting Chairman, Federal Deposit 
  Insurance Corporation (FDIC)...................................    14
Johnson, Simon, Ronald A. Kurtz Professor of Entrepreneurship, 
  MIT Sloan School of Management.................................    52
Marx, Alexander, Head of Global Bond Trading, Fidelity 
  Investments....................................................    55
Peebles, Douglas J., Chief Investment Officer and Head of Fixed 
  Income, AllianceBernstein, on behalf of the Securities Industry 
  and Financial Markets Association's Asset Management Group.....    58
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange 
  Commission (SEC)...............................................    11
Standish, Mark, President and Co-CEO, RBC Capital Markets, on 
  behalf of the Institute of International Bankers (IIB).........    60
Tarullo, Hon. Daniel K., Governor, Board of Governors of the 
  Federal Reserve System.........................................    10
Turbeville, Wallace C., on behalf of Americans for Financial 
  Reform.........................................................    57
Walsh, Hon. John, Acting Comptroller of the Currency, Office of 
  the Comptroller of the Currency (OCC)..........................    15

                                APPENDIX

Prepared statements:
    Garrett, Hon. Scott..........................................    78
    Hinojosa, Hon. Ruben.........................................    80
    Carfang, Anthony J...........................................    83
    Elliott, Douglas J...........................................    94
    Evans, Scott.................................................    97
    Gensler, Hon. Gary...........................................   139
    Gruenberg, Hon. Martin J.....................................   143
    Johnson, Simon...............................................   161
    Marx, Alexander..............................................   165
    Peebles, Douglas J...........................................   180
    Schapiro, Hon. Mary L........................................   187
    Standish, Mark...............................................   198
    Tarullo, Hon. Daniel K.......................................   211
    Turbeville, Wallace C........................................   220
    Walsh, Hon. John.............................................   232

              Additional Material Submitted for the Record

Hinojosa, Hon. Ruben:
    Letter from the Small Business Investor Alliance.............   242
Perlmutter, Hon. Ed:
    Chapter written by Adair Turner..............................   244
Schweikert, Hon. David:
    Letter from the American Bankers Association.................   249
    Written statement of BlackRock, Inc..........................   251
    Written statement of the Bond Dealers of America.............   258
    Letter from the Business Roundtable..........................   262
    Letter from CMS Energy.......................................   264
    Comment letter of Professor Darrell Duffie...................   267
    ``Market Making Under the Proposed Volcker Rule,'' by 
      Professor Darrell Duffie, Stanford University..............   269
    Written statement of ICI Global..............................   300
    Written statement of the Investment Company Institute........   307
    Written statement of the Securities Industry and Financial 
      Markets Association........................................   319
    Written statement of SVB Financial Group.....................   372
Carfang, Anthony J.:
    Written responses to questions submitted by Representatives 
      Peters, Grimm, and McCarthy................................   382
Evans, Scott:
    Written responses to questions submitted by Representative 
      McCarthy...................................................   386
    Written responses to questions submitted by Representative 
      Peters.....................................................   387
Gruenberg, Hon. Martin J.:
    Written responses to questions submitted by Chairman Bachus..   388
    Written responses to questions submitted by Representative 
      Biggert....................................................   390
    Written responses to questions submitted by Representative 
      Peters.....................................................   391
    Written responses to questions submitted by Representative 
      Huizenga...................................................   392
    Written responses to questions submitted by Representative 
      Grimm......................................................   393
    Written responses to questions submitted by Representative 
      McCarthy...................................................   394
Marx, Alexander:
    Written responses to questions submitted by Representatives 
      Peters and McCarthy........................................   395
Peebles, Douglas J.:
    Written responses to questions submitted by Representatives 
      Peters and McCarthy........................................   407
Schapiro, Hon. Mary L.:
    Written responses to questions submitted by Chairman Bachus..   426
    Written responses to questions submitted by Representative 
      Peters.....................................................   440
    Written responses to questions submitted by Representatives 
      Huizenga and Peters........................................   442
    Written responses to questions submitted by Representative 
      Grimm......................................................   443
    Written responses to questions submitted by Representative 
      Biggert....................................................   448
    Written responses to questions submitted by Representative 
      McCarthy...................................................   449
Standish, Mark:
    Written responses to questions submitted by Representative 
      McCarthy...................................................   450
    Written responses to questions submitted by Representative 
      Peters.....................................................   452
Tarullo, Hon. Daniel K.:
    Written responses to questions submitted by Chairman Bachus..   454
    Written responses to questions submitted by Representatives 
      Huizenga and Peters........................................   461
    Written responses to questions submitted by Representative 
      Peters.....................................................   462
    Written responses to questions submitted by Representative 
      McCarthy...................................................   463
Turbeville, Wallace C.:
    Written responses to questions submitted by Representatives 
      Peters, Carson, and McCarthy...............................   464
Walsh, Hon. John:
    Written responses to questions submitted by Chairman Bachus, 
      and Representatives Peters, Huizenga, Grimm, and Biggert...   472


                      EXAMINING THE IMPACT OF THE
                  VOLCKER RULE ON MARKETS, BUSINESSES,
                      INVESTORS, AND JOB CREATION

                              ----------                              


                      Wednesday, January 18, 2012

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                           and Consumer Credit, and
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 9:33 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the Subcommittee on Financial 
Institutions and Consumer Credit] presiding.
    Members present from the Subcommittee on Financial 
Institutions and Consumer Credit: Representatives Capito, 
Renacci, Royce, Manzullo, McHenry, Pearce, Westmoreland, 
Luetkemeyer, Huizenga, Duffy, Canseco, Fincher; Maloney, 
Gutierrez, Watt, Hinojosa, McCarthy of New York, Baca, Lynch, 
Miller of North Carolina, Scott, and Carney.
    Members present from the Subcommittee on Capital Markets 
and Government Sponsored Enterprises: Representatives Garrett, 
Schweikert, Royce, Manzullo, Biggert, Neugebauer, Pearce, 
Posey, Hayworth, Hurt, Dold, Grimm, Stivers; Maloney, Waters, 
Sherman, Hinojosa, Lynch, Miller of North Carolina, Green, 
Ellison, Perlmutter, Donnelly, Carson, Himes, and Peters.
    Ex officio present: Representatives Bachus and Frank.
    Chairwoman Capito. This hearing will come to order.
    I would like to welcome everybody back from the Christmas 
and New Year's holiday. We want to start with a good hearing, 
and I think that's what we have in front of us today.
    I would like to thank both panels of witnesses for coming 
this morning. The participation in this morning's hearing will 
help our members of the Capital Markets and the Financial 
Institutions Subcommittees better understand the complexities 
and the far-reaching nature of the proposed Volcker Rule.
    Members and our witnesses should note that the first panel 
will be excused at noon; and, as we do expect Floor votes 
around 1 p.m., we will see what happens from there. Given the 
size of the second panel, we will likely recess and then come 
back at the call of the Chair.
    Today's hearing will examine implementation of Section 619 
of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, commonly referred to as the Volcker Rule, after former 
Federal Reserve Chairman Paul Volcker. This rule will prohibit 
U.S. bank holding companies and their affiliates from engaging 
in proprietary trading. We are going to learn a lot about the 
definitional boundaries of proprietary trading today.
    Proponents of Section 619 have made assertions that 
proprietary trading, the practice of banks buying and holding 
securities for their own accounts, was a key contributor to the 
financial crisis. On the contrary, Chairman Volcker himself has 
admitted that proprietary trading in commercial banks ``was not 
central to the crisis.'' I think this raises questions about 
the size and scope of the problems that Section 619 is seeking 
to resolve.
    The Federal financial regulators have been tasked with 
writing rules to carry out the objectives of Section 619. The 
result of their efforts is a proposed rule that is nearly 300 
pages long and asks more than 1,300 questions for comment from 
market participants. This has led to significant confusion--I 
will put myself in that vote--and many unanswered questions 
over the consequences of implementing Section 619.
    This morning's hearing will give members of the Capital 
Markets and Financial Institutions Subcommittees the 
opportunity to better understand the decision-making process of 
the Federal agencies. Our second panel of witnesses will 
testify to the potential effects the proposed rules will have 
not only on financial institutions but also institutional 
investors, pension funds, shareholders, and the American public 
in general.
    I would like to really thank our witnesses for joining us 
here today. This is a very serious issue, and the participation 
of the principals from the financial regulators is greatly 
appreciated by this chairman and the entire committee.
    At this point, I would like to yield to the ranking member 
of the Financial Institutions Subcommittee, Mrs. Maloney from 
New York, for the purpose of making an opening statement.
    Mrs. Maloney. I want to thank the chairwoman for calling 
this very important hearing, and to welcome all of our 
distinguished guests, particularly two who were former 
residents of the great City of New York: Mary Schapiro and Gary 
Gensler. We look forward to your testimony.
    We are here today because of the financial crisis and 
recession which cost American families over $17 trillion in 
household wealth and business wealth, and over 5.5 million 
jobs. We are still recovering from this crisis, and a very 
important part of that recovery and the Dodd-Frank reform 
legislation was the Volcker Rule which we are discussing today, 
which some believe is the most important part of Dodd-Frank in 
terms of preventing another crisis. And I might add that as 
recently as September, building on the crisis we already had, 
the Swiss bank UBS lost $2.3 billion, thanks to a rogue 
unregulated trader; and MF Global, although not a depository 
institution, still cannot find over $1.3 billion. So, we 
clearly have a challenge.
    This past crisis, like most, was caused primarily by 
unregulated areas of the market through loan defaults, 
unconventional banking activities such as mortgages, loans, and 
commercial real estate, which led to no market liquidity, no 
capital, and dried-up credit markets. The risky proprietary 
trading activities of some financial institutions, including 
some of the largest broker-dealers--Bear Stearns, Merrill 
Lynch, and Lehman Brothers--contributed to these conditions. 
Other losses at financial institutions would have brought them 
to bankruptcy had there not been extraordinary government 
intervention taken.
    Chairman Volcker proposed a ban on proprietary trading 
because he believed financial firms should be serving their 
clients, rather than taking risky bets for their own book of 
business, which in some cases would have put depositors at 
risk. Bonuses were tied to excessive risk-taking, unlike the 
Volcker Rule. Now, bonuses are rightly tied to fees and bid-ask 
spreads. The regulators have taken his simple, clear goal and 
made it overly complex, in my opinion, with over 298 pages of 
rules that are accompanied by over 1,000 questions.
    I agree with the testimony last month by Sheila Bair--the 
former Chairman of the FDIC--before the Senate Banking 
Committee, where she stressed that the rule is too complex, 
particularly in seeing the bright line between proprietary 
trading and market making. Some financial institutions have 
already ended proprietary trading and have literally set up 
separate financial institutions for this purpose.
    Chairman Volcker has said that recognizing proprietary 
trading activity should be simple: You know it when you see it. 
But I do not see how you can see it unless you have access to 
the data.
    I am hearing some concerns from some of my constituents 
that the burden of providing this data is overwhelming. I would 
like to know from the panelists today to what extent the new 
compliance requirements are different from what financial 
institutions have had to provide in the past, and how are they 
different or are they the same as what the new Office of 
Financial Research will be collecting.
    While there were many causes that helped create the 
financial crisis, an inability of regulators and interested 
parties to see financial transactions was certainly one of 
them. Regulation did not cause the financial crisis, but we are 
discussing today ways to prevent another one in the future, and 
the Volcker Rule is an important part of that discussion and an 
important part of that prevention. It is important that we get 
it right.
    I look forward to your testimony today, and to seeing your 
final rule.
    Thank you.
    Chairwoman Capito. Thank you.
    I would like to recognized the chairman of the full 
Financial Services Committee, Chairman Bachus, for 3 minutes.
    Chairman Bachus. Thank you, Chairwoman Capito, for holding 
this hearing, along with Chairman Garrett.
    To the regulators, I know that what you are doing is trying 
to carry out Section 619. That is what the Congress asked you 
to do, to prohibit proprietary trading, and I think that was a 
mistake. I think Section 619 was a mistake, and I think that is 
where the problem lies, that our request to you was a mistake.
    None of us want to go through what we did in 2008 and 2009; 
we want to avoid the mistakes of 2008 and 2009. But proprietary 
trading was not one of those mistakes. Secretary Geithner has 
said that it did not cause the financial crisis. I am not sure 
that it contributed to the financial crisis. There were 
companies engaged in proprietary trading that did other 
dangerous activities, undercapitalized, overleveraged, and we 
certainly want to avoid that. And with Basel 3, I think the 
entire global community is going towards greater capital 
standards and we are addressing liquidity--leverage. You are 
addressing that.
    But 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. They are the 
deepest and the most liquid in the world. And proprietary 
trading actually contributes to that liquidity. It contributes 
to that availability of capital. If we had not had liquid 
assets during the financial crisis, many of the loans to 
companies that otherwise would have failed would not have been 
made.
    These rules, I will admit are a responsible request from 
this Congress, from Dodd-Frank, but Section 619, in my opinion, 
will be a self-inflicted wound on this country, its economy, 
and its financial markets, because a country will not have a 
strong economy if its financial markets are not stable. They 
have to be safe, but they also have to be liquid. There has to 
be capital for investment. I believe this will restrict 
capital, I believe it will drive up the cost of loans, and I 
believe it will make our financial markets and, thus, our 
economy and our country less safe.
    So thank you--and let me end by saying that it will also 
cost jobs. I think that is becoming evident to all of us. It 
will cost hundreds of thousands of jobs.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize the ranking member of the Capital 
Markets Subcommittee, Ms. Waters from California, for 3 
minutes.
    Ms. Waters. Thank you very much, Chairwoman Capito and 
Chairman Garrett, for holding this joint hearing on the Volcker 
Rule.
    Three years ago, this country experienced the worst 
financial crisis since the Great Depression; and families 
continue to struggle with the resultant unemployment, 
foreclosures, and loss of equity in their homes. And while 
observers will disagree about the central cause of the crisis, 
I think there is wide agreement that a number of factors played 
a role in what we experienced in 2008.
    One of these factors certainly was proprietary trading or 
when banks make speculative investments in financial 
instruments from their own accounts rather than on behalf of 
the clients. This type of trading, while profitable during good 
times, proved to be tremendously harmful when bets on real 
estate and other assets started to soar. The GAO reports that 
in the 5 quarters during the financial crisis, the 6 largest 
U.S. holding companies lost a combined $15.8 billion from 
stand-alone proprietary trading desks.
    The Dodd-Frank Act, under the provision commonly known as 
the Volcker Rule, attempts to grapple with this particular 
cause of the financial crisis not by prohibiting proprietary 
trading altogether, but by stating that banks which have access 
to the Federal safety net cannot use that advantage to make 
speculative bets in the market.
    The Volcker Rule likewise prohibits commercial banks from 
investing in hedge funds and private equity funds with certain 
small exemptions. The rationale behind this provision is that, 
while there is a justification for government support for 
commercial banks whose presence ensures a stable and continued 
flow of credit to small businesses and individuals, there is no 
public policy rationale for taxpayer subsidies for banks 
trading.
    However, even with clear prohibitions under the Volcker 
Rule, Congress recognized that commercial banks should still be 
able to serve clients through underwriting and market making or 
acting as an intermediary between buyers and sellers in a 
securities market and gave regulators significant flexibility 
to implement this provision. So I think the approach that 
Congress adopted under the Volcker provision was very measured 
and attempted to surgically excise only those elements of 
trading that posed the greatest risk.
    As one of our witnesses will testify to today, of course, 
the devil is in the details; and I am curious to hear from the 
witnesses here today on how they think this rule is being 
implemented by the interagency group of regulators on the first 
panel. In particular, I want to make sure that market making is 
not impeded and that the rule is not bogged down in complexity 
that will hinder compliance.
    So as I have said during on previous hearings on the 
implementation of Wall Street reform, I hope that the 
regulators are being responsive to legitimate industry concerns 
while they also uphold the intent of what we did in Dodd-Frank.
    I look forward to the witnesses' testimony today, and I 
yield back the balance of my time.
    Chairwoman Capito. Thank you.
    I recognize Mr. Royce for 2 minutes.
    Mr. Royce. Thank you, Madam Chairwoman.
    On the topic of international cooperation, 2 years ago we 
had the Deputy Treasury Secretary Wolin say we are working 
closely with our G-20 partners to make sure that we get a 
regime that works worldwide so that we don't have new 
opportunities for arbitrage. That was the view then.
    Then, about 6 months ago, Michel Barnier, the European 
Union's top financial regulator, came back and said that 
European regulators won't seek a measure similar to Volcker. 
``We don't have the same approach,'' is what he said.
    So what has become clear in the months since passage is 
that neither Asia nor Europe are on board, and we are nowhere 
near a regime that works worldwide. And, instead, we go along 
with the hope that this approach will protect our markets here 
from another crisis.
    Unfortunately, better protecting our capital markets 
doesn't come from micromanaging financial institutions. It 
comes from ensuring that no institution is too-big-to-fail, and 
enforcing higher capital requirements and liquidity standards. 
So if Volcker is going to be a priority for the Administration, 
it needs to be clear and concise, something that Paul Volcker 
noted, and there needs to be international buy-in.
    And unfortunately, the proposed rule is anything but clear 
or concise. Ironically, we seem to get intra-national 
coordination. Among the five regulators responsible for this, 
we can't seem to get them on board, let alone the 
implementation of the larger international cooperation we are 
seeking here. We have a problem internally getting concurrence 
on this.
    So until our capital markets operate effectively and allow 
for failure, the best policy response is to make the rules so 
simple that everyone can understand and enforce them, thus 
preventing carve-outs and special favors. Volcker takes us in 
the opposite direction here.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Scott is recognized for 2 minutes for the purpose of an 
opening statement.
    Mr. Scott. Thank you very much, Chairwoman Capito.
    This is indeed an important hearing, examining the impact 
of the Volcker Rule on markets, businesses, investors, and job 
creation.
    In October, our Federal regulators issued a joint proposal 
on implementation of the rule, and it totaled 300 pages, over 
1,300 questions, and 400 topics. Originally, the comment period 
established by Federal regulators had been scheduled to end 
last Friday, January 13th. However, to me and to many of my 
House colleagues, this timeline seemed much too brief in order 
to effectively capture the impact of this extensive and lengthy 
proposal.
    Therefore, I joined with 120 Members of Congress in 
cosigning a letter to our regulators requesting that the 
comment period for the rule be extended, and I expressed in the 
letter that there remained several unanswered questions about 
the Volcker Rule that must be carefully examined before its 
adoption. The rule will affect capital formation for United 
States' businesses and, thus, the national economy in general 
at a time when a recovery is needed more than ever.
    I was and I remain a very strong supporter of the Dodd-
Frank financial legislation from which the Volcker Rule's 
provisions originated. However, this is my concern. We must be 
sure that the implementation of such a far-reaching rule will 
not have negative effects on overall market liquidity, thereby 
limiting economic growth. Our national economic health has an 
opportunity to improve, and it is improving greatly as we 
speak, and any action must be made deliberatively to warrant a 
healthy and lasting economic recovery. That is paramount.
    I look forward to the questions. Thank you very much, Madam 
Chairwoman.
    Chairwoman Capito. Thank you.
    I recognize Mr. Neugebauer for 1\1/2\ minutes for an 
opening statement.
    Mr. Neugebauer. I thank the chairwoman and I thank Mr. 
Scott for being one of the 121 Members who signed that letter, 
and I appreciate the regulators' response to that.
    I would remind you there were three parts of that letter. 
One was to extend the comment period, and the second part of 
that was to re-propose a rule after you had all of these 
comments. We have a piece of a rule here that has over 300 
pages, and asks 1,300 questions. And so, you have to believe 
that after you hear back from all on those questions that 
obviously re-proposing the rule is the only right solution to 
make sure that after you have heard the answers to those 
questions obviously, hopefully, it makes the rule more 
effective.
    And then the third part of that is, because of this 
process, to move the deadline for implementation, because while 
you kept the comment period open, you did not extend the 
effective date.
    But I think interwoven into that, which is extremely 
important, is to have a comprehensive cost-benefit analysis. 
Because what we are hearing from both industries, from other 
countries, that this has far-reaching effects on the financial 
markets moving forward. Studies out there are saying this is 
going to cost investors billions of dollars, going to cost 
borrowers billions of dollars, and really basically change the 
landscape on transactions that we have been doing for a very 
long period of time.
    So I hope as we move forward today that we can have more 
discussion about what kind of cost-benefit analysis is actually 
going on and has been developed through this process, and I 
thank the chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize the ranking member of the full 
Financial Services Committee, Mr. Frank, for 3 minutes.
    Mr. Frank. For how much time?
    Chairwoman Capito. I was informed it would be 3 minutes.
    Mr. Frank. Thank you.
    I speak as one of the 315 Members of the House who hasn't 
asked to you delay this. I must say that it does seem to me the 
delay here was a stalking horse for opposition in the case of 
most people, and I am particularly struck in general by people 
who don't like regulation, and who think things are actually 
running pretty well from the legal standpoint during the time 
when all the troubles were accumulating, they have said they 
really are concerned about uncertainty and they blame a lot on 
uncertainty. So what are they asking for now? More uncertainty. 
They are asking for a delay in this rule. It is in the statute. 
It is coming. I don't understand how you reconcile an argument 
that uncertainty is our major problem with a plea for more 
uncertainty by delaying the rule.
    We are also told that this is going to be putting us in 
international disadvantages by some. My understanding--and I 
hope this will be elaborated on in the testimony--is that in 
England, our major competitor in the financial area, they have 
a proposal called ``ring-fencing.'' I don't know what that 
means in England, but, whatever it is, as I read it, it seems 
to be more restrictive on the deposit-taking institutions than 
what we are proposing.
    And I think we do sometimes have financial institutions, 
when they talk about international regulation, they follow the 
motto of the teenage child of divorced parents playing mommy 
off against daddy, claiming that, ``He will let me do it,'' or 
``She will let me do it.'' I do think, as I said, England has 
gone even further here.
    Then, we are told we shouldn't do anything about it because 
it wasn't the cause of the crisis. I agree this particular 
thing was not the cause of the crisis. But the notion that in 
adopting regulation, we should deal only with things that have 
already proven to be problematic and not try to anticipate and 
not try to make other improvements, I think is a grave error. I 
do think that there is a reason to do this in a very 
comprehensive way.
    Finally, there is a complexity argument. As I understand 
the complexity argument, you are guilty, you regulators, of 
trying to accommodate some of the concerns that the financial 
institutions had. There are people who have Glass-Steagall 
nostalgia. They talk about how it was six pages. A very simple 
rule could have been formulated, but it would not have 
accommodated the concerns that you heard from the financial 
institutions. So, to some extent, they are complaining about 
your having accommodated them.
    The final thing--I said final, but there is one last point.
    Chairwoman Capito. If I may interrupt the ranking member 
for just a moment, I was informed incorrectly. You are to have 
5 minutes. So, you don't have to talk so fast, or you don't 
need to wrap up so quickly. You have an additional 2 minutes.
    Mr. Frank. There is the option of repeating myself, but we 
all take advantage of that. That comes with the territory.
    I will talk about--and I appreciate that, Madam Chairwoman.
    I was talking about complexity. One of the legitimate 
concerns we have heard is that market making is important 
because of liquidity. Although I was impressed with a chapter I 
just read in a compilation put out by the London School of 
Economics by Adair Turner, the head of the Financial Services 
Authority, in which he makes the argument, I think 
persuasively, that doing anything that increases liquidity, 
even by a very small amount, regardless of what it might mean 
in terms of instability, is not a good idea. There is a cost-
benefit analysis that has to be applied for people who say 
anything that gives us more liquidity--I have bonds, and I 
would like them to be able to sell, but I don't think they 
would have to be sold in 8 seconds for me to be satisfied.
    Market making is, however, a legitimate concern here. And 
what I am told by some is, well, yes, we understand that the 
regulators say they will allow market making by institutions 
regardless--that the Volcker Rule will allow them to engage in 
market making, but we are afraid that they will overregulate, 
that they will be too tough; and, therefore, institutions 
fearful of excessive rigidity and harshness, fearful of 
vindictive regulatory action if they come to close to the line 
will pull back too far.
    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? In fact, I 
think the record is very clear that our regulators over time, 
both parties have--if anything, we have underregulated and 
underapplied the rules.
    But one of the things I will ask our witnesses is, and I 
think this is important, my understanding is that the 
regulators do appreciate the importance of market making 
because of the legitimate contribution it makes to liquidity. 
And I would think a very good thing to do to not have 
uncertainty would be to get the rule put in place in a 
reasonable time period, not further delaying it and having the 
regulators demonstrate in fact what I hope they will 
demonstrate today rhetorically that they appreciate the 
importance of market making and do not intend to enforce this 
rule in any way that will impinge on legitimate market-making 
activities.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I now recognize Mr. Grimm.
    Mr. Grimm. Thank you, Madam Chairwoman.
    First, let me state that I disagree with my colleague on 
the other side of the aisle, the ranking member. I think the 
Volcker Rule is a terrible idea, and I think it should be 
repealed.
    Proprietary trading, as we just heard, was not a driving 
cause in the financial crisis, and this rule I think will do 
little more than add needless costs and complexity to an untold 
number of financial transactions. So, with that being said, it 
is my opinion that the regulators have also been a bit 
overzealous in proposing the rule and somehow found a way to 
make--through incredibly creative ways, actually--a terrible 
rule even worse.
    You take the exemptions of municipal securities, for 
example. Dodd-Frank is silent on the distinction between 
general obligation bonds and limited obligation bonds. Yet, the 
regulators saw fit to insert into the rulemaking language that 
explicitly subjects limited obligation bonds to the Volcker 
Rule. This decision will limit liquidity in these securities 
and raise the borrowing costs of municipalities for cities like 
New York City.
    With that, I will yield back.
    Chairwoman Capito. Thank you.
    And, finally, I would like to recognize Mr. Canseco for 1 
minute for the purpose of making an opening statement.
    Mr. Canseco. Chairwoman Capito, I would like to thank you 
and Chairman Garrett for having this hearing.
    When Dodd-Frank was passed a year-and-a-half ago, we were 
promised that there would be international coordination to 
ensure that the U.S. financial industry would not be left at a 
competitive disadvantage. Yet in the case of the Volcker Rule, 
the United States finds itself charging ahead while competing 
markets wait to find out just how big of an advantage they may 
have.
    In the international context, Volcker was supposed to be 
one of our field of dreams regulations: If we build it, they 
will come. Yet, no other country has adopted anything similar 
to the Volcker Rule, and as we will hear from our second panel 
today, the proposed rule would have a negative impact not just 
on U.S. competitiveness but on the individual investors, 
pensioners, and small businesses that rely on our capital 
markets for economic security. These types of outcomes have 
indeed become a disturbing trend in the wake of Dodd-Frank, and 
I am eager to hear from our witness today on this very 
important matter.
    Thank you.
    Chairwoman Capito. Thank you.
    That concludes our opening statements. I would now like to 
introduce our witnesses for the purpose of giving a 5-minute 
opening statement.
    I will begin with the Honorable Daniel Tarullo, Governor, 
Board of Governors of the Federal Reserve System.
    Welcome.

 STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you, Chairwoman Capito, Chairman Bachus, 
Ranking Member Waters, Ranking Member Frank, and other members 
of the committee.
    I should begin by saying that I think our goal--certainly 
at the Federal Reserve but really of all the regulators--is to 
implement the Volcker Rule in a manner that is faithful to the 
language of the statute but in a manner that maximizes 
financial stability and other social benefits at the least cost 
to credit availability and economic growth. That is, we begin 
with the statutory language and we work from there.
    I found that the biggest drafting challenge in implementing 
the Volcker Rule is to distinguish between prohibited 
proprietary trading on the one hand and underwriting, market 
making, and hedging on the other. In my prepared remarks, I 
used market making to make this point and I will try to do so 
briefly in this oral presentation.
    While there are relatively obvious examples of pure 
proprietary trading, and at least a textbook version of pure 
market making, in the broad middle between these two clear 
cases falls a good bit of what we actually see in firms. The 
difficulty is that a proprietary trade and a trade pursuant to 
market making can be indistinguishable based solely on the 
features of the trade itself. In both activities, the banking 
entity is acting as principal, holds the position for a 
relatively short time, and gains a profit or suffers a loss 
based upon any price variation in the security during the time 
it is held.
    The statute recognizes this difficulty and uses an intent 
test to distinguish between the two types of trade. Thus, the 
definition of trading account refers to the purpose of near-
term resale and the intent to profit from short-term price 
movements.
    Obviously, it will be difficult for regulators to monitor 
purpose and intentionality directly. So, the agency proposal 
sets forth a framework that includes the factors that the 
agencies see differentiating prohibited and permitted trades, 
includes a requirement that firms establish a compliance 
program in accordance with those factors, and includes data 
collection and reporting requirements to facilitate monitoring 
of firm compliance and the potential development of more 
precise guidance over time.
    There is no question that this is not a simple test. Staffs 
and principals from the agencies considered various possible 
alternative approaches. And while some alternatives may seem 
simple when described in a sentence, they proved to promise 
considerable complexity or deviation from the statutory 
standards in practice. That is, as we thought through what they 
would mean in practice. So that is why the proposed rule takes 
the approach that it does.
    But we are clearly open to a better idea if there is one 
out there. I would only ask that anyone making such a proposal 
first remember that we have to follow the statute and, second, 
to give us enough detail so we can make a comparison of the 
relative efficiency and efficacy of that idea relative to the 
proposed agency rule.
    Thank you very much.
    [The prepared statement of Governor Tarullo can be found on 
page 211 of the appendix.]
    Chairwoman Capito. Thank you.
    Next, I would like to recognize the Honorable Mary 
Schapiro, Chairman, U.S. Securities and Exchange Commission, 
welcome.

  STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. 
            SECURITIES AND EXCHANGE COMMISSION (SEC)

    Ms. Schapiro. Thank you.
    Chairwoman Capito, Chairman Bachus, Ranking Members Waters 
and Maloney, and members of the subcommittees, thank you for 
the opportunity to testify regarding the Commission's joint 
proposal with the Federal banking agencies to implement Section 
619 of the Dodd-Frank Act, commonly referred as to the Volcker 
Rule.
    The proposal reflects a collective and extensive effort by 
the agencies to design a reasonable and balanced rule 
implementing the required prohibitions and restrictions on 
proprietary trading and investing in covered funds in a way 
that is consistent with the language and purpose of the 
statute.
    As you know, the statute defined a number of key terms, 
including banking entities subject to the rule, proprietary 
trading, and trading accounts. Under the law, any position that 
is in a banking entity's trading account is subject to the 
statutory provisions.
    The proposed rule captures all SEC-registered dealers and 
security-based swap dealers accounts as trading accounts. The 
proposal also recognizes the need for these entities to be able 
to provide critical liquidity to our markets, capital for 
issuers, and intermediation services to customers. Therefore, 
while the proposal, consistent with the statute generally, 
prohibits proprietary trading, it does allow market making, 
underwriting, and risk mitigating hedging.
    In drafting the proposed rule, the Commission and its staff 
focused on these three activities because they are absolutely 
integral to the effective operations of the securities markets.
    In particular, underwriting activity is important to 
capital formation and economic growth. The proposal, like the 
statute, continues to permit trading activities that serve an 
important role in support of effective underwriting.
    Much like underwriting, the proposal recognizes the very 
important benefits of market making, including customer 
intermediation and market liquidity. Permitting legitimate 
market making in its different forms should facilitate market 
liquidity and efficiency by allowing covered banking entities 
to continue to provide customer intermediation and liquidity 
services in both liquid and illiquid instruments.
    As acknowledged in the proposal, effective market making 
also involves hedging of market making positions and 
anticipatory market making related trading activity.
    The proposal also recognizes that an overly broad 
interpretation of underwriting market making or risk mitigating 
hedging could result in these exemptions being used for evasive 
purposes. In addition, where exemptions are permitted, an 
exemption is not available if the transaction or activity 
involves a material conflict of interest, higher risk assets or 
trading strategies, or a threat to a covered banking entity's 
safety and soundness or to U.S. financial stability.
    Further, a key component of the proposed rule is the 
requirement for a tiered compliance program reasonably designed 
to monitor a banking entity's permitted activities including, 
again, underwriting, market making and hedging, and investing 
in covered funds and to ensure compliance with the specific 
requirements of the statute and the proposal.
    As an additional means of monitoring market-making 
activities and preventing evasion of the prohibition on 
proprietary trading, the proposal sets forth specific 
quantitative measurements that certain covered banking entities 
would be required to calculate, report, and record for their 
trading units engaged in market-making activities.
    The statute also specifies that a banking entity may not 
invest in or sponsor a hedge fund or a private equity fund, 
which are defined in the proposed rules as ``covered funds.'' 
The Commission recognizes that it is critical to define covered 
fund in a manner that would implement the purposes of the 
statute; and, thus, the proposal seeks extensive comment on the 
proposed approach as well as alternative ideas. We expect that 
commenter input will help inform our understanding of the 
potential scope and impact of the proposed definition.
    Finally, the proposal includes a joint request for comment 
on the potential impacts of the proposed implementation of the 
statute, including the potential compliance costs, competitive 
effects, and impacts on market liquidity and efficiency. In 
addition, the proposal seeks commenters' views on the costs and 
benefits of all aspects of the proposal, as well as comment on 
whether alternative approaches to implementing the Volcker Rule 
would provide greater benefits or involve fewer costs. We 
encourage commenters to provide quantitative data to the extent 
possible in support of comments regarding the potential 
economic impact of this proposal.
    In conclusion, we are committed to working closely with our 
fellow regulators to carefully review the comments and to 
further refine the rule prior to adoption.
    I will be happy to answer your questions.
    [The prepared statement of Chairman Schapiro can be found 
on page 187 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is the Honorable Gary Gensler, Chairman, 
Commodity Futures Trading Commission.
    Welcome.

 STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, COMMODITY 
               FUTURES TRADING COMMISSION (CFTC)

    Mr. Gensler. Good morning, and thank you, Chairwoman 
Capito, Chairman Garrett, and Ranking Members Maloney and 
Waters. It is also good to see Chairman Bachus and Ranking 
Member Frank of the full committee. Thank you for inviting me 
to speak today on the Volcker Rule. I also am glad to join my 
fellow regulators in testifying today.
    Following Congress' mandate last week, the CFTC-proposed 
Volcker Rule is consistent with the joint rule proposed in 
October by Federal regulators.
    The Commission's proposal also included additional 
questions. I know there were 1,300, but we added a few 
additional questions seeking public comment on whether certain 
provisions of the common rules are even applicable to CFTC 
registrants which are part of a banking entity.
    The Dodd-Frank Act, as we have all just been talking about, 
amended the Bank Holding Company Act to prohibit banking 
entities from engaging in proprietary trading, yet also 
permitted certain activities. The one that has gotten the most 
talk here is about market making and risk mitigating hedging. 
So the law requires the banking entities with significant 
trading activities to have policies and procedures in place to 
identify and prevent violations of this statutory provision on 
proprietary trading.
    The Dodd-Frank Act directs the CFTC to write rules 
implementing the Volcker requirement for just those parts of 
the banking entity for which the agency is a primary regulator. 
So what does that mean in real terms? The CFTC's role with 
regard to the Volcker Rule is significant, but it is a 
supporting member along with the bank regulators who have the 
lead on bank holding companies.
    The Dodd-Frank Act requires that the various regulators 
consult and coordinate, and that is what we have done, though 
we were a bit later than others, just sheer capacity issues at 
the CFTC. But the proposed rule would apply to the activities 
that we register at the CFTC. What is that? Futures Commission 
merchants and swap dealers.
    For a swap dealer that is part of a larger bank, the CFTC 
rule applies just to the activities of the swap dealer, not the 
broader activities of the bank. Or for a Futures Commission 
merchant that is also registered as a broker-dealer, our rule 
would be about their futures activities. For their brokerage 
activity, that would be over at Chairman Schapiro's Commission.
    In adopting the Volcker Rule, Congress prohibited banking 
entities from proprietary trading, an activity that may put 
taxpayers at risk. But, at the same time, Congress permitted 
banking activities to engage in market-making activities, 
something that is vital to the liquidity of the capital 
markets. So one of the challenges that we as regulators are all 
faced with is finalizing the rule in achieving these twin goals 
that Congress laid out for us.
    I think it will be critical to hear from the public on how 
best to achieve Congress' twin mandates, as I would call them 
here. The public has been invited to comment on this for 60 
days, in our case, which hopefully brings us in line with the 
other regulators. I think there will be substantial public 
input, and we look forward to it.
    As with other rules, the CFTC is working to implement this 
rule in a thoughtful, balanced way, not against the clock; and 
the Commission specifically requests comments from the public 
regarding the cost, benefits, and economic effects of the 
proposed rule.
    In Chairmen Capito and Garrett's letter to us inviting us 
to speak here today, you solicited and asked us questions about 
the economic effect, which I believe are included in the CFTC's 
release. But further in conversations with Chairman Bachus and 
a number of the chairs of the subcommittees, you have stressed 
the importance as we move forward to finalize the rule in 
taking into consideration the economic effects of the rule; and 
I think consistent with these conversations, we will do just 
that--carefully consider all of the incoming public comments, 
importantly including those on the economic effects.
    I thank you and look forward to your questions.
    [The prepared statement of Chairman Gensler can be found on 
page 139 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is the Honorable Martin J. Gruenberg, 
Acting Chairman, Federal Deposit Insurance Corporation.
    Welcome.

    STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, ACTING 
     CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

    Mr. Gruenberg. Thank you very much, Chairwoman Capito, 
Chairman Garrett, Chairman Bachus, Ranking Members Frank, 
Waters, and Maloney, and members of the subcommittees. Thank 
you for the opportunity to testify today on behalf of the FDIC 
on the proposed regulations to implement the so-called Volcker 
Rule.
    Section 619 of the Dodd-Frank Act is intended to strengthen 
the financial system and constrain the level of risk undertaken 
by firms that benefit from the safety net provided by Federal 
deposit insurance and access to the Federal Reserve's discount 
window.
    While Section 619 broadly prohibits proprietary trading, it 
provides several permitted activities that allow banking 
entities to continue to offer important financial 
intermediation services and to ensure robust and liquid capital 
markets. Most notably, Section 619 allows banking entities to 
take principal risk to the extent necessary to engage in bona 
fide market-making and underwriting activities, risk mitigating 
hedging, and trading activities on behalf of customers.
    The statute also prohibits acquiring and retaining an 
ownership interest in or having certain relationships with a 
hedge fund or private equity fund subject to certain 
exemptions. The challenge to the regulators--and I really think 
this has been articulated by all of us this morning--in 
implementing the Volcker Rule is to prohibit the types of 
proprietary trading and investment activity that the statute 
intended to limit while allowing banking organizations to 
provide legitimate intermediation in the capital markets.
    Consistent with the requirements of Section 619 of the 
Dodd-Frank Act, the FDIC participated in a coordinated 
interagency rulemaking effort with the Federal Reserve, the 
OCC, the SEC, and the CFTC. In drafting the proposed rule, the 
agencies also benefited from the required FSOC study on 
implementing the Volcker Rule and the many comments received 
from interested stakeholders.
    As drafted, the proposed rule is intended to carry out the 
statutory requirements to prohibit proprietary trading and 
establish prudent limitations on interest in the relationships 
with hedge funds and private equity funds consistent with 
Section 619. It is intended to allow banking entities to 
continue to engage in permitted activities including bona fide 
market-making and underwriting activities, risk mitigating 
hedging, trading on behalf of customers, and investments in 
covered funds consistent with the statutory mandates. The goal 
is to allow banking organizations to continue to provide 
important financial intermediation services.
    While most proprietary trading has been conducted by the 
largest bank holding companies, the FDIC and other agencies 
have carefully considered and limited the potential impact of 
the proposed rule on small banking entities and banking 
entities that engage in little or no covered trading 
activities. Accordingly, the agencies have proposed to limit 
the application of certain requirements such as reporting and 
recordkeeping requirements and compliance program requirements 
for those banking entities that engage in less than $1 billion 
of covered trading activities or covered fund activities and 
investments.
    Further, the FDIC and its fellow agencies recognize that 
there are economic impacts that may arise from the proposed 
rule and its implementation; and, therefore, we specifically 
requested public comment and information on this issue. As has 
been noted, we extended the comment period until February 13th 
to allow interested persons more time to analyze the issues and 
prepare their comments. The agencies will analyze the potential 
impacts of the rule based on the comments received and work to 
minimize the burden on the industry and the public while 
meeting the statutory requirements set by the law.
    Thank you very much, and I will be glad to respond to your 
questions.
    [The prepared statement of Acting Chairman Gruenberg can be 
found on page 143 of the appendix.]
    Chairwoman Capito. Thank you.
    Our final witness is Mr. John Walsh, Acting Comptroller of 
the Currency, Office of the Comptroller of the Currency.
    Welcome.

 STATEMENT OF THE HONORABLE JOHN WALSH, ACTING COMPTROLLER OF 
 THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Walsh. Thank you, Chairmen Garrett and Capito, Ranking 
Members Waters and Maloney, members of the subcommittees, and 
Chairman Bachus and Ranking Member Frank. I appreciate the 
opportunity to appear today to provide an update on the work of 
the Office of the Comptroller of the Currency in connection 
with the Volcker Rule.
    As you have heard the OCC, the Fed, the FDIC, and the SEC 
published our implementing regulation on November 7, 2011. The 
legislation itself is complex, and its impact and the impact of 
its implementing rules will have significant consequences for 
the operations of our Nation's banking firms and the financial 
system as a whole.
    Recognizing these considerations and to enable commenters 
to react to the CFTC's subsequently proposed rule to implement 
Section 619, the OCC, the Federal Reserve, the FDIC, and the 
SEC recently extended the deadline for submitting comments on 
our proposal by 1 month, to February 13th. We are hopeful that 
this extension will give the public more time to evaluate the 
proposal and provide robust comments.
    As described in my written statement, the agency's proposal 
implements the prohibitions, restrictions, permitted activity 
exceptions, backstops, and rules of construction of Section 
619. This combination of statutory provisions alone is quite 
complex.
    The proposed rule also establishes requirements for 
statutorily permitted activities and interprets many of the 
permissible activity provisions conservatively, including in 
particular the provisions for underwriting, market-making 
related activities, and risk mitigating hedging. Admittedly, 
the proposal's approach for implementing the statutorily 
permitted activities introduces a number of operational 
complexities in an effort to be precise in drawing distinctions 
between permissible and prohibited activities.
    The proposed rule also requires banking entities engaged in 
any permitted activity to develop and implement a compliance 
program that addresses internal policies and procedures, 
internal controls, a management framework, independent testing, 
training, and recordkeeping. The extent of these requirements 
escalates depending upon the volume of activity.
    It has been noted by many that the proposal contains an 
unusually large number of questions. While the number of 
questions may seem daunting, they were driven by our desire to 
understand what may be quite complicated and significant 
consequences of elements of the proposal and to provide a sound 
legal basis for adjusting key areas of the rule where the 
agencies deem that necessary.
    As the regulator of many of the banks that will be most 
affected by the Volcker Rule, the OCC is particularly concerned 
with how to strike the right balance in identifying and 
preventing impermissible activities without undermining 
activities that are safe, sound, and profitable; that help 
reduce a bank's overall risk profile; and that contribute to 
healthy and liquid markets.
    We also recognize the compliance burdens on banking 
entities of all sizes arising from the proposal and therefore 
will be keenly interested in whether comparably effective 
compliance results could be achieved through less burdensome 
approaches.
    We appreciate the concerns raised about the potential 
burden of the proposed regulation in addition to the Volcker 
Rule statutory provisions. To date, the OCC has completed an 
assessment of the impact of the proposal on OCC-regulated 
entities under the Unfunded Mandates Reform Act and the 
Regulatory Flexibility Act. We are also soliciting extensive 
comments on the full economic impact of the proposal, including 
its impact on market making and liquidity, cost of borrowing by 
businesses and consumers, and the price of financial assets. We 
have strongly encouraged comments on these issues and hope that 
the extended comment period will facilitate thoughtful and 
robust responses.
    The letter of invitation also solicits views on whether the 
proposal places U.S. banking entities at a competitive 
disadvantage.
    Competitive consequences here have various sources. There 
are competitive consequences that follow from provisions of the 
statute that reflect legislative choices made by Congress that 
may differ from approaches adopted in other jurisdictions. 
These differences are based on policy as well as risk 
management grounds, and it is not unique for the United States 
and other jurisdictions to have differences on such issues.
    Second, the manner in which the provisions of the statute 
are implemented by regulation can affect its competitive 
impact. This is why we welcome comments on the impact of the 
proposed rulemaking on the competitiveness of U.S. banking 
entities as well as comments on the flexibilities that may 
exist in the statutory requirements.
    I appreciate the opportunity to update the committee on our 
work. This is very much a work in process. We appreciate your 
concerns and will certainly keep the committee advised of the 
status of the rulemaking effort.
    I am happy to answer your questions.
    [The prepared statement of Acting Comptroller Walsh can be 
found on page 232 of the appendix.]
    Chairwoman Capito. Thank you.
    I want to thank all the witnesses, and I would like to 
begin the questioning.
    Governor Tarullo, you mentioned--I think one of the most 
telling parts of your statement was when you said you are 
clearly open to new ideas. And I think all of you have 
expressed a real eagerness to see the comments and the comment 
period, but you have asked for backup data and details to 
legitimize that. I am concerned--and I think many of us have 
expressed this--in this time of economic slowdown, what kind of 
effect this would have on the man on the street here in West 
Virginia or other various States in terms of obtaining credit, 
in terms of our community banks being able to supply funds for 
small businesses, home mortgages, etc. Is this one of the 
effects that you are going to be looking at in more detail as 
you move through this comment period?
    Mr. Tarullo. Certainly, as I said, Madam Chairwoman, the 
task for us is to figure out the most effective and efficient 
way to implement the statutory language. To my mind, that 
includes considering the effects of the various alternatives 
that are available. The impact on credit and credit 
availability which would presumably come through the liquidity 
channel that several of your colleagues have mentioned would be 
one of those.
    Chairwoman Capito. Thank you.
    Chairman Schapiro, we were talking in the back room, and 
somebody mentioned that Mr. Volcker had said of proprietary 
trading, ``You will know it when you see it.'' And then you and 
I discussed whether proprietary trading desks were still going 
forward, and you had mentioned that some of them have already 
closed their solitary proprietary trading desks but that some 
proprietary trading would be embedded in other areas of an 
investment bank.
    How are the differentiations--it seems so very complicated. 
I have the flow chart here. That certainly put me to sleep last 
night when I got to about page 3 trying to flow through the 
flow chart. How are you going to make these distinctions when 
you get into the guts--or how are they, I guess--it is going to 
be incumbent upon them to be distinguishing, people sitting 
side by side, basically on appearance moving in the same 
direction but by definition or definitionally maybe engaging in 
market making or maybe engaging in proprietary trading.
    Ms. Schapiro. That's a great question, Madam Chairwoman. I 
think the easy part maybe has been answered, that the bright 
line proprietary trading desks are easy to identify. Many firms 
have in fact, as you and I talked about, already moved ahead 
and disbanded those.
    The proposal tries to help regulated entities think about 
how to distinguish proprietary trading from market making. In 
fact, it lays out a series of principles around risk 
management, source of revenues, revenues relative to risk, 
customer facing activities, payment of fees, commissions, and 
spreads, and in thinking through each of those areas helps to 
determine what might be market making and what might be 
proprietary trading. So, for example, market makers generally 
earn fees, commissions, and spreads. Proprietary traders 
routinely pay fees, commissions, and spreads.
    Source of revenues are different--not entirely, not 
perfectly, not with a bright line between them--but they tend 
to be different for market makers versus proprietary traders. 
Customer facing activity is obviously different for market 
makers than it is for proprietary traders. So the rule tries to 
give guidance on how to think about distinguishing market 
making from proprietary trading.
    I want to say in addition that we recognize as a capital 
markets regulator in particular the absolute criticality of 
market making to successful capital markets. For issuers, 
investors, and traders, market making is a critical function. 
So we have asked a lot of questions about whether we have 
gotten this exemption for market making right in the proposal 
and how might we change it if that's what is necessary to 
ensure that critical function continues for trading purposes 
and in support of underwriting and hedging.
    Chairwoman Capito. Thank you. Mr. Walsh, I would like to 
ask you, you mentioned this in your statement, but I think this 
is a source of concern, and it has been voiced by some of our 
U.S. allies--Japan, the United Kingdom--that the Volcker Rule 
could cause some operational and transactional cost of trading 
in their bonds and that they are concerned about that. Do you 
have a comment to make about that?
    Mr. Walsh. I didn't speak directly to that, but obviously--
    Chairwoman Capito. You talked about competitive advantages 
around the world, so--
    Mr. Walsh. Right. It is certainly something to which we 
will want to pay careful attention. The Canadians, the 
Japanese, the U.K., have expressed some concerns about trading 
in their sovereign bonds, and so we want to certainly take a 
look at that as we consider the final--
    Chairwoman Capito. Is that contained in the rule as it is 
created right now?
    Mr. Walsh. I think their concern is that there is 
preferential treatment of U.S. Treasuries while other 
instruments are caught by the rule, and that it will create a 
distinction that may affect them adversely. So, we will want to 
take a look at that.
    Chairwoman Capito. Thank you. I would like to recognize Mr. 
Frank for questioning for 5 minutes.
    Mr. Frank. Thank you. Let me begin on the market-making 
issue, and again, I want to stress one of the things I think we 
should be looking at is the extent to which liquidity is a 
goal, and as I believe the erroneous notion that--liquidity is 
almost like the magic word; if it increases liquidity, it 
trumps other considerations. But market making is truly a very 
important, legitimate liquidity function, and the concern is 
that, I have heard voiced, even though you collectively say you 
respect market making and that it is going to be important, 
because of the ambiguity, because it depends on motive, that 
people will stop short of what you might allow because of fear 
of excessive regulation.
    So let me ask all of you, do you believe that if the rule 
were to be adopted substantially, as proposed, you could 
administer it in a way that would allow market making, 
legitimate market-making activity to go forward and, as that 
happened, give the institutions the confidence that they could 
continue engaging in it?
    Let's start with Mr. Tarullo.
    Mr. Tarullo. I believe we can. I think--
    Chairwoman Capito. If I could interrupt for just a moment. 
Some of the Members are having trouble hearing, so if you could 
pull the microphone close and sort of speak up, it would be to 
our benefit.
    Mr. Tarullo. Is that better?
    Chairwoman Capito. That is better.
    Mr. Tarullo. Okay. I think we can. The rule, the proposed 
rule, as you can tell, is informed by an expectation that there 
is going to be an iterative quality to its implementation. That 
is why we are asking each of the firms to develop a compliance 
plan that is consonant with the principles and factors that we 
lay out in the proposed rule. It is also why we are going to be 
requiring reporting, so that we can monitor how different kinds 
of market making are in fact proceeding, and give us the 
opportunity to monitor whether this is or is not market making.
    Mr. Frank. Let me go--
    Mr. Tarullo. I think the combination of the conformance 
period and the firm-specific compliance will allow us to, over 
time, develop the application of the rule in such a way that 
legitimate market making should be--
    Mr. Frank. And it is your intention to protect legitimate 
market making?
    Mr. Tarullo. Oh, of course, absolutely.
    Mr. Frank. Chairman Schapiro?
    Ms. Schapiro. I really don't have anything to add. I agree 
completely with Governor Tarullo. I think we can administer it 
in a very rational way. We are not intending, in any sense, to 
be doing trade-by-trade analysis, to look at every transaction 
to see if it is proprietary trading or market making but, 
rather, to collect data that will allow us to see over time 
what the--
    Mr. Frank. Let me just ask, as SEC enforcement has come up, 
people have been saying you have to be tougher. If some bank in 
the process engages in activities which it turns out weren't 
market making, what are you going to do to them?
    Ms. Schapiro. I think it would depend a lot on what their 
intent was. Was their intent to violate the Volcker Rule or was 
their intent to--
    Mr. Frank. So if it is inadvertent--
    Ms. Schapiro. --engage in market making and they just get 
it wrong sometimes? We have no interest in pursuing activity 
where people are intending to provide market-making services 
but get it wrong.
    Mr. Frank. Chairman Gensler?
    Mr. Gensler. As the CFTC has done in other rules, we hope 
that when we finalize this, it will be a policies and 
procedures approach, that these banking entities have to have 
policies and procedures to ensure something, but that they 
actually are the ones ensuring that they can do market making--
I believe that is critical--but they are not doing proprietary 
trading. But I would say we are going to be informed by the 
comments as well. This is really important, as we say, to get 
balance, to get it right. So if people point out that we don't 
have it right, that we make adjustments.
    Mr. Frank. But also in practice, I guess part of it is what 
is the mindset that you approach? That is, I think it is 
important to affirm that you all agree that market making is 
legitimate and that you understand there is an ambiguity there, 
so people should not worry about getting too close to the line 
because an inadvertent crossing of the line, especially in the 
early phases, isn't going to bring forward some terrible 
punishment.
    Mr. Gensler. I think that is correct. I think even Congress 
addressed that because there is a conformance period that the 
Federal Reserve will oversee, but that conformance period is 
not one with a lot of teeth.
    Mr. Frank. Thank you, Mr. Gensler. I am not sure about the 
implications of ``even Congress,'' but that is okay.
    Mr. Gruenberg.
    Mr. Gruenberg. Congressman Frank, I think it is important 
to underline that there is a 2-year compliance period provided 
by the statute for these companies to implement the rule, so in 
some sense there will be an extended period of engagement 
between the regulators and the companies.
    Another point to make is we have a tiered approach for 
reporting trading activity. At the end of the day, it is going 
to be a relatively small number of large companies that are 
going to be impacted by this, so we are going to have an 
opportunity to work through this process. At the extremes, it 
is clear when it gets close--
    Mr. Frank. Let me just, if I could just for a few seconds, 
I don't want to exclude Mr. Dugan.
    Mr. Walsh. He was my predecessor--
    Mr. Frank. Mr. Dugan, I am sorry. We did exclude Mr. Dugan.
    Mr. Walsh--you would think since I am from Massachusetts, I 
could get those names straight.
    Mr. Walsh. In any case, I agree with all that has been 
said.
    Mr. Frank. Let me just summarize, if I could have 10 
seconds, Madam Chairwoman. I think it is very clear. If people 
don't like the rule, they don't like the rule. But if you look 
at the implementation, if you look at the way our regulators 
have worked, I think the notion that people are going to be 
scared away from doing market making because of an excessive 
rigidity has no real foundation. And I am encouraged to know 
that these five regulators all are committed to making sure 
that market making goes forward and understand the importance 
of a regulatory framework in which people are encouraged to do 
that. Thank you.
    Chairwoman Capito. Thank you. I would like to recognize the 
chairman of the full Financial Services Committee, Chairman 
Bachus, for 5 minutes for questions.
    Chairman Bachus. Thank you. I would say to Ranking Member 
Frank, famous last words, if you don't think some individual 
regulator or examiner will not misinterpret. You are asking, 
and I think every witness has said you are asking regulators to 
determine motive and intent, and that is a tremendously 
difficult, problematic--
    Mr. Frank. Will the gentleman yield? We ask 6 processors to 
do that all the time.
    Chairman Bachus. I will if I have additional time. Now, 
Ranking Member Frank, you will recall that we looked at this in 
the House and decided against the Volcker Rule. It was only 
sort of at the last hour that Senator Carl Levin and Senator 
Shelley Berkley and some others urged us to go forward with the 
Volcker Rule. That was my understanding. It certainly didn't 
pass out of the House.
    Mr. Frank. If I could get 15 seconds, the gentleman is 
right; it wasn't in the House, but there was a press conference 
in the White House that I attended long before it got to the 
end. But it was not in the House bill, I agree.
    Chairman Bachus. Yes. And you will recall around that same 
time, Paul Volcker--let me tell you, we all have tremendous 
respect for him, and I think that is how we got here, is we all 
respected him, and when he said this is something you need to 
do, no one wanted to cross him, at least some people didn't. 
But he said you can't draw a bright line between these 
activities, yet, we have asked these five agencies to do just 
that.
    Now, Chairman Schapiro, you have said that you are not 
going to look at individual trades. I don't know how you don't 
end up on some occasion in the future looking at an individual 
trade. I know you probably will assure me that you won't, but I 
can't imagine how you can enforce a rule if you don't look at 
trades.
    Ms. Schapiro. If I could respond to that, the statute, the 
rule is done largely under the Bank Holding Company Act.
    Chairman Bachus. I agree, bank holding companies are 
prohibited from doing this.
    Ms. Schapiro. With respect to our narrow part of it, which 
is really broker-dealers and security-based swap dealers, and 
for those provisions that are done under the Bank Holding 
Company Act, although there are several that are also done 
jointly under the Exchange Act, but for those under the Bank 
Holding Company Act, our only mechanism, after notice and 
opportunity for hearing, would be to direct a company to 
terminate an activity or divest an investment. It is only with 
respect to the compliance program and the reporting and 
recordkeeping requirements that the SEC's Enforcement Division 
would have its full panoply of enforcement powers.
    Chairman Bachus. Of course. But let's say that it is almost 
impossible to distinguish. Paul Volcker said it is going to be 
impossible to draw a bright line. So, companies are going to 
legitimate hedging, underwriting, market making, which can all 
be beneficial, which all create jobs in the United States, and 
which did not contribute to the last financial crisis. Those 
jobs will go someplace else. We talked about our relationships 
with Canada, with England, with Japan. We were assured--in the 
Conference, we had a discussion where Mr. Kanjorski assured us 
that most of the G20 nations would go along with this, and I 
offered an amendment that we wouldn't--it took a majority of 
the G20, and it was rejected. But we were told that they would, 
we are sure our allies will all go along with this. None of 
them have. And these jobs are going to go overseas. They are 
going to go to Canada. Plus, I have relatives in Canada who 
come to Arizona for the winter. Well, they do. We have snow 
birds, and they all come down to Florida. This tourist trade in 
Florida depends on the Canadians.
    In our second panel, Mark Standish will testify that they 
will move those jobs that are presently in the United States to 
Canada because their ability to meet their customers' orders or 
investments--they are not going to be able to do so.
    To the regulators--they said to us, ``We are following your 
orders;'' all five of them said, ``We are doing what you asked 
us to do.'' I am not blaming them. They have been given an 
impossible order.
    I am over my time. I am just going to close with what Jamie 
Dimon said, and Governor Tarullo, I think you referred to this 
in a different manner. This is psychology. He talked about 
how--and I don't think it is an exaggeration--every trader is 
going to need a psychiatrist and a lawyer sitting next to him. 
We have all done things that later on we were accused of doing 
something terrible when it was legitimately hedging, when it 
was--yes, but we are--we have all been there. When we have to 
interpret people's motives, we are on thin ice. Thank you.
    Chairwoman Capito. Thank you. I would like to recognize the 
ranking member of the Capital Markets Subcommittee, Ms. Waters, 
for 5 minutes.
    Ms. Waters. Thank you. I will yield--
    Chairwoman Capito. I am going to stick to 5 minutes now. I 
gave them both an extra minute there.
    Ms. Waters. I would like to yield 10 seconds to the ranking 
member of the full Financial Services Committee, Mr. Frank.
    Mr. Frank. I won't be substantive about this, but I 
disagree with the chairman's summation of the history. It is 
true that the Volcker Rule per se, in those words, was not in 
the House bill. There were things in the House bill that the 
gentleman from North Carolina, the gentleman from Colorado, Mr. 
Kanjorski himself, all had versions of things that approached 
it. And in fact, there was a press conference early in 2010, 
long before the Senate began to take up the bill, in which 
several of us endorsed the Volcker Rule. So he is right, it 
wasn't in the House bill, but it was not a last-minute 
addition.
    Chairman Bachus. Will the gentleman yield for 15 seconds to 
me?
    Mr. Frank. It is not my time. If we could--could we give 
another 15 seconds--not from the gentlewoman's time? I would 
hope we can do that.
    Ms. Waters. The gentlewoman will yield another 10 seconds.
    Chairman Bachus. I am just saying in the Senate and in the 
conference, it grew into something else.
    Mr. Frank. No, I--the gentleman has--
    Chairman Bachus. And the gentleman from Colorado will tell 
you that.
    Mr. Frank. This is what we said in a press conference 
earlier in the year. It was not something that just came out 
of--
    Chairwoman Capito. I am going to ask the gentlemen to cease 
and let the gentlewoman continue with her questions.
    Mr. Frank. I would ask unanimous consent that the 
gentlewoman have an additional 30 seconds.
    Chairwoman Capito. Without objection, it is so ordered.
    Ms. Waters. Thank you very much. I would like to continue 
on the discussion about market making that was initiated by 
Ranking Member Frank. One of the concerns that has been 
expressed by financial institutions is a requirement that 
regulators distinguish between market-making activities and 
proprietary trading activities. Members of Congress who 
supported the Volcker Rule during Dodd-Frank consideration felt 
that, done properly, market making is not speculative and could 
be compensated from spreads and fees rather than from changes 
in the prices of the financial instrument.
    When you first gave your testimony, Mr. Tarullo, you 
indicated that you believed that you could distinguish between 
proprietary trading and market making, and you also offered 
that if anybody has a better mousetrap, you certainly would 
like to hear it, and that we have this extended period of time 
where you will be entertaining some ideas.
    Now, as I understand it, all of this coordination has been 
going on between all of the agencies. And I guess, Mr. Gensler, 
you have had some responsibility, even though you say it is not 
significant, with this coordination, with the Treasury having 
the lead role.
    Does everyone agree that given the law, Dodd-Frank, as it 
is, that you have to move forward in describing how you can 
distinguish between market making and proprietary trading and 
that you are all committed to doing that? I will start with 
you, Mr. Gensler. What is your role?
    Mr. Gensler. The CFTC has a significant role.
    Ms. Waters. I can't hear you.
    Mr. Gensler. The CFTC has a significant role with regard to 
swap dealers that are part of bank entities and also the 
Futures Commission merchants. And yes, to your question, I 
think that we are to move forward to achieve these twin goals 
of prohibiting proprietary trading, permitting market making, 
and making sure that this can be fostered, and comments are 
going to help inform us tremendously.
    Ms. Waters. So in the coordination that has been going on, 
is everyone on board for moving forward in the way that Mr. 
Tarullo explained at this time? Each person, yes or no?
    Mr. Gensler. Yes.
    Ms. Schapiro. We are very open to additional--
    Ms. Waters. I can't hear you.
    Ms. Schapiro. We are very open to additional ideas and 
approaches, yes.
    Mr. Gruenberg. Yes.
    Ms. Waters. Yes?
    Mr. Walsh. Yes.
    Ms. Waters. All right. So, no one at the table this morning 
is here to talk about repeal of the Volcker Rule, but rather, 
how you are working to try and be consistent with the law as it 
is described in Dodd-Frank; is that correct?
    Does anyone at this point in time have new ideas or better 
ideas or more information about market making that would make 
it easier to distinguish between market making and proprietary 
trading activities at this time? Any more information we should 
know about?
    Ms. Schapiro. There is a long history at the SEC of 
regulating market making in the equity and fixed-income 
markets, and much of that thinking has been incorporated into 
the proposal that the agencies have generated together. A lot 
of it hinges on the ability and the willingness to hold 
yourself out as being willing to make markets and provide two-
sided quotes on a continuous or a regular basis, and to be a 
buyer to sellers.
    We recognize that is not perfect, that historical basis 
upon which market-making exemptions have been based, but it is 
a starting point, and we have asked commenters lots of 
questions to give us better information or different ideas 
about how to make the market-making exemption effective going 
forward.
    Ms. Waters. We have a few more seconds. Would anyone like 
to add anything to that? Mr. Gruenberg?
    Mr. Gruenberg. Just to say that I think it is important to 
acknowledge that we are still in the midst of the comment 
period, the extended comment period. And I think the proposed 
rule went to great effort to solicit a broad public comment on 
a range of issues, and in particular the ones that you raised, 
and I think Chairman Schapiro pointed this out. I think the 
feedback we get will be very important in terms of formulating 
the final rule.
    Ms. Waters. I think that your presence here this morning is 
extremely important, and maybe one of the most important things 
that will come out of your presence here this morning is that 
you are all working together, the coordination is taking place, 
you are committed to making the Volcker Rule work, you want to 
make sure that you get additional input, and that period has 
been extended, regulatory period has been extended in order to 
do that. And so, I think that clears up in my mind that you are 
not working to advise us that the Volcker Rule should be 
repealed at all but, rather, it can be worked with. I yield 
back the balance of my time.
    Chairman Garrett [presiding]. The gentlelady yields back 
the balance of her time. And just coming into the committee, I 
appreciate the opportunity to see the panel today and for your 
statements and for the questions. I will now recognize myself 
for 5 minutes and, without objection, I will put my opening 
statement in the record.
    Despite what the ranking member just said, we are obviously 
dealing with an extremely complicated issue here--a rule, with 
over 1,300 individual questions, and obviously, there are a 
number of issues that are still out there. So I would like, for 
the first question, to just quickly run down through the panel. 
Do you believe individually, as your agencies, that you have 
the authority to waive the implementation date for the rule?
    Mr. Tarullo. The Federal Reserve, Mr. Chairman, has 
authority under Dodd-Frank to extend the conformance period.
    Chairman Garrett. Okay. Yes.
    Mr. Tarullo. That was--
    Mr. Gensler. I believe under the Bank Company Holding Act, 
it is the Federal Reserve.
    Mr. Gruenberg. I agree with that.
    Chairman Garrett. Everyone agrees. So then, the next 
question is easy. Will you agree, in light of the questions 
that have already come up and in light of the questions I 
presume that are going to come up afterwards, that it is 
necessary to do so and to not put a burden on the businesses? 
Because we have heard about the extraordinarily astronomical 
billions of dollars that it will cost to comply with this in 
following this hearing to put a--within 30 days to waive the 
statutory deadline so we can have a longer period of time.
    Mr. Tarullo. I am sorry; we may be conflating two things 
here, Mr. Chairman.
    Chairman Garrett. Okay.
    Mr. Tarullo. One is the final date for the final rule, and 
then the other is the period within which the rule has to be 
implemented. The latter is committed by Dodd-Frank to the Fed 
alone. The former would be a joint decision of all the 
agencies.
    Chairman Garrett. Exactly. And so, I will restate the 
question quickly. Would we agree here today that we should 
extend that period of time?
    Mr. Tarullo. If you are talking about the first point, 
which is when there should be a final rule in place, I think it 
depends on the kind of comments that we are getting and the 
extent of the changes that we think we would need to make. I 
think we extended it for 30 days.
    What normally happens in a rulemaking is you look at all 
the comments you get in, and then you make an assessment as to 
how much you are going to have to modify your proposed rule. 
Sometimes, it is around the edges.
    Chairman Garrett. I take it the answer is ``no.'' The point 
here is, at this point in time, as you know, industry is--
stakeholders are already trying to answer the questions that 
are out there and also are already trying to change their 
businesses in light of what the proposed rules are taking or 
proposal to take. So, it would help if we actually had that 
extension now so that they would actually know that in light of 
all the complexity of this issue, because it is unlike almost 
any other issue, but I understand the question.
    Commissioner Gensler, many people have said that you move 
too quickly on some of your proposed rules and regulations, 
myself included. On this one, of course, you came out a little 
bit after the fact. Commissioner Sommers raised the question at 
the last hearing, and so let me ask this question to you now. 
Assuming for the sake of argument that each of the regulators 
sitting next to you on the panel decides to repropose their 
rules in light of information that comes out, what would be 
your intention at that point? To issue a reproposed rule as 
well so that there is one final joint rule coming out at the 
same time? How would that work?
    Mr. Gensler. At the CFTC, we are committed to getting the 
rules right and balanced and not against a clock, and we have 
reproposed some other rules. We are actually looking forward to 
reproposing a very important rule for the markets called the 
block rule for swaps as well. That would probably be the third 
or fourth time we have reproposed something. So if the other 
regulators came to that conclusion, I assume that we would come 
to that conclusion jointly and do the same with them.
    Chairman Garrett. I appreciate that, thank you.
    Mr. Tarullo, the language of Section 619(g)(2) expressly 
says this, and I will read it: ``Nothing in this Section shall 
be construed to limit or restrict the ability of a banking 
entity or a nonbank financial company supervised by the board 
to sell or securitize loans in a manner permitted by law.''
    So, given this language, can you clarify how the risk 
retention Section of 941 and the restrictions on banks owning 
funds in the proposed rules will impact upon the issuers of 
asset-backed securities?
    Mr. Tarullo. Obviously, the risk retention rules, I think--
are you asking a question about how the two would--
    Chairman Garrett. Yes, jibe, which is--
    Mr. Tarullo. --intersect?
    Chairman Garrett. Right.
    Mr. Tarullo. Our presumption would be that the Volcker Rule 
enforcement would take as given whatever the requirements of 
the final rules on risk retention would be, and would try to 
ensure that there not be any further constraint on 
securitization beyond what those rules or other exogenous rules 
would require.
    Chairman Garrett. So you would see to it that there would 
not--your goal would be to see to it that there is not a 
cumulative effect, I guess is what I am thinking of?
    Mr. Tarullo. I think the aim is to make sure that you don't 
have some incremental inhibition upon securitization beyond 
what rules are, by their own nature, intended to do with 
respect to regulating securities.
    Chairman Garrett. All right. And then a final question, 
along that line. Do you believe, in general, that the proposed 
rules, as many people suggested, will negatively impact upon 
liquidity in the markets, in the corporate bond markets, 
corporate markets such as for the--especially for the mid-cap 
companies and such?
    Mr. Tarullo. Will there be some incremental effect on 
liquidity in some markets at the margin? I think the answer is 
probably ``yes.''
    Chairman Garrett. It is only going to be at the margin, 
though?
    Mr. Tarullo. Well, no; I said would there be some. Beyond 
that, I think the answer to the question depends upon two 
things. First, how well we do at implementing the intention 
everybody here has stated, which is to try to make sure that 
market making is preserved.
    Chairman Garrett. And if you don't do it, will it go past 
the margins then?
    Mr. Tarullo. It could, sure. And second, the degree to 
which nonregulated firms pick up, particularly proprietary 
trading, and I think at least one firm has already stated 
publicly that they see enormous opportunities here.
    Chairman Garrett. I appreciate that. My time has expired. I 
yield to the gentlelady from New York, Mrs. Maloney, and 
recognize her for 5 minutes.
    Mrs. Maloney. I thank the gentleman for yielding. And all 
of the panelists, one of our other colleagues on the other side 
of the aisle, or several, have said that if we enact the 
Volcker Rule, that our banks will move overseas. I would 
venture that the model overseas is very different from the 
efficient model we have in America that has made us the 
strongest capital market in the world. In Europe, large banks 
can invest in industrial companies, so if you bail out the 
bank, you get to bail out the bank and the industrial companies 
in which they have invested. The model is very different in 
America, and it is one that has traditionally been stronger and 
more efficient.
    My colleague, Chairman Bachus, expressed some concern that 
the regulators are going to have difficulty determining the 
motive and intent and the difference between proprietary 
trading and market making. And I would venture to say that the 
CEOs and executives in the American financial systems have the 
same concern. They want to make sure that their organization is 
market making and not doing illegal proprietary trading, so 
they will be partners in helping to place a window on what is 
happening in these areas.
    The author of the amendment, Paul Volcker, has said, 
``Proprietary trading is easy; you know it when you see it.'' 
But I would venture to say it is difficult to see it if you 
don't have the data to analyze it and understand what is taking 
place.
    I therefore would like to ask, and I am going to ask 
Governor Tarullo to comment on it, but also to get in writing 
back from the panelists--because I think this is an important 
point--to what extent would the new compliance requirements 
involve the collection and reporting of data that banking 
entities have not been required to report in the past? I would 
venture that a lot of what they are reporting is what they have 
had to do in the past. And how do the metrics that you have 
created in the proposed rule ensure that you will be able to 
know it when you see it, and what metrics would be different, 
really, and information different between market making and 
proprietary trading?
    We are also moving, as you know, for a research center that 
would have information on the content, and how important do you 
think is this information in preventing crises and problems in 
the future, Governor Tarullo?
    Mr. Tarullo. Ranking Member Maloney, I think that the first 
point is that there are some firms which currently collect 
information in a way that would allow distinctions to be drawn, 
or at least give insight into market making or hedging versus 
proprietary trading. Others do not. So, the interagency 
proposal would move towards some standardization of both the 
management information systems of the firms and, consequently, 
their reporting to us.
    Second, I think that when we start getting that 
information, we will be substantially better positioned to draw 
the kinds of distinctions that all of you are asking about, 
because I think it is important to note that what market making 
consists of in one kind of market, say for corporate bonds of 
Fortune 500 companies, is different from what market making may 
be in the case of a less traded instrument,, and we are going 
to need data that distinguishes among those different markets 
in order to oversee this rule effectively.
    Mrs. Maloney. Thank you. The Volcker Rule is basically five 
words: market making, underwriting, risk mitigation. Yet, when 
you look at this rule, it is roughly 300 words, 25 pages, if 
not more. And I would like to ask the panelists what is in this 
295 pages? How much of it is exceptions and how much of it is 
truly defining the real Volcker Rule? I will start with Mr. 
Gensler.
    Mr. Gensler. A lot of it is questions, 1,300, as people 
have noted. I don't know what page count that takes, but it 
could be half of the document. But a lot of it is really trying 
to get at achieving these twin goals--market making or, of 
course, underwriting and hedging, which are so critical to the 
capital markets.
    Mrs. Maloney. How much is exceptions?
    Mr. Gensler. I think Congress actually laid out seven key 
permitted activities or, if you wish, exceptions. And 
underwriting, market making, and hedging are three critical 
ones, but there are others as well, and we want to fully comply 
with the intent of Congress.
    Mrs. Maloney. Chairman Schapiro?
    Ms. Schapiro. It is largely--a lot of it is the exceptions, 
the permitted activities, the criteria for determining the 
permitted activities, and then a discussion about the 
compliance program and the kind of metrics, records, and 
reporting that would need to be done so that financial 
institutions and regulators are in a position to understand if 
those exemptions are being appropriately applied.
    Mrs. Maloney. And I noticed there was no enforcement in 
these 200-some, almost 300 pages, no enforcement if there is a 
violation. Would anyone like to comment on that?
    Mr. Tarullo. Towards the end of the regulation, there is a 
subSection on what can be done in the event of noncompliant 
activities. But because this is part of the Bank Holding 
Company Act, our full panoply of supervisory, regulatory, and 
enforcement tools would be available to us in appropriate 
circumstances.
    Mrs. Maloney. My time has expired. Thank you.
    Mr. Schweikert [presiding]. Thank you, Mrs. Maloney. I 
yield myself 5 minutes--great timing. And this is for anyone on 
the panel, but we will start with--and I always mispronounce 
your name; is it ``Tarullo?''
    Mr. Tarullo. ``Tarullo.''
    Mr. Schweikert. In an environment where we are stepping 
into Basel 3 and the level of reserves and the definitions of 
Tier 1 and Tier 2 and what can be held there, how does that all 
mesh when we now head into the proprietary trading rules in 
Volcker and what can be moved and what can't? Am I causing 
damage? Are the rules combined, this new regulatory scheme? How 
much damage to liquidity, to where capital is, are we going to 
have certain amounts of idle capital? Explain to me how they 
mesh together and how they don't.
    Mr. Tarullo. That is an important question because the 
Basel 3 exercise, actually it was Basel 2.5, the part of the 
Basel 3 exercise that was concluded a couple of years ago 
addressed specifically the trading book, and thus we are in the 
same universe that we are talking about with the Volcker Rule. 
There was a widespread view, a correct one I think, that 
capital regulation of trading activities had been seriously 
inadequate in the years running up to the crisis, and so a good 
bit of what Basel 2.5 did was to adjust the risk weights for 
traded assets.
    There is an intention to take another look at the trading 
book more generally, because those were some quick changes that 
were obviously related to the sources of the crisis. And in 
taking that look, I think obviously when one looks at the 
amount of risk associated with a particular pattern of trading, 
you are going to want to have higher capital associated with 
higher risk, which is open position, so in that sense the two 
do merge.
    Mr. Schweikert. Okay. Does anyone else want to touch on 
that point? Madam Chairman?
    Ms. Schapiro. I would just note that, and I have not had a 
chance to read this carefully yet, but a study was released 
earlier this week by Darrell Duffie at Stanford University that 
suggests that in lieu of trying to define market making and put 
limitations on market making, that much more rigorous capital 
and liquidity requirements might be another way to approach the 
kinds of issues that we are seeking to address through Volcker. 
But I haven't read it carefully, so I can't tell you whether I 
agree with it or not.
    Mr. Schweikert. But in some ways, that is ultimately what 
at least the Basel 3 is heading towards; am I correct?
    Mr. Tarullo. It may in the next iteration of the trading 
book review, although, again, Congressman, to the degree that 
an activity is not being pursued within a firm, then the higher 
capital requirements that would otherwise be associated with it 
would obviously not be applicable to that firm.
    Mr. Schweikert. I made the mistake of leaving some of my 
notes over there, but I will try to do part of this off the top 
of my head.
    Has anyone--and I know you are working through thousands of 
comments out there, trying to build a velocity model, a model 
that basically says if we did a far-reaching version of the 
Volcker Rule through definition, what happens to the banking 
system, particularly the large banks, how much less velocity, 
how much is now sitting in reserves, how much idle capital? Is 
anyone out there building an economic model for the regulation 
to do the tests?
    Mr. Tarullo. I think it would be premature to try to work 
through that kind of analysis since, as several of my 
colleagues have noted, we are in the process now of gathering 
comments and then eventually refining the rule. And I think as 
we keep saying in response to many of your questions and 
comments, we want to ensure that to the degree possible, the 
kinds of market-making operations that are going on now that 
are entirely legitimate continue as such.
    The other issue, of course, is going to be something I 
mentioned before, which is the degree to which straight 
proprietary trading is going to be picked up by other firms, 
hedge funds or others who see new market opportunities.
    Mr. Schweikert. Mr. Gruenberg--and I don't have it in front 
of me, but the letter that came out from the Canadian banking 
regulator--explain to me their concerns and why--first explain 
their concerns, and we will go on to the second part of that.
    Mr. Gruenberg. I think under the Volcker Rule, there is an 
exception for companies to trade in U.S. securities, U.S. 
Government securities, but that benefit is not extended to the 
government securities of other countries. And I think the focus 
of the letter from the Canadians was on that issue, that they 
would want the ability, at a minimum, to have the exception for 
trading in their own government securities that U.S. firms have 
in regard to U.S. Government securities.
    I would note that in the preamble to the rule, we raise a 
question specifically on this issue, whether we should consider 
some flexibility in that area, and I think we will be getting 
comments, and this will be one of the issues we will be looking 
at.
    Mr. Schweikert. All right. I have so many questions, but I 
am out of time. I believe now it is 5 minutes to Mr. Gutierrez.
    Mr. Gutierrez. Thank you very much. It seems like we are 
discussing--sometimes we just forget how we all got here or why 
we are here. I kind of remember back in 2008 the cardiac arrest 
our economy went into, and now we are discussing whether or not 
we should lower our fat intake or exercise or maybe stop 
smoking; maybe it is okay, let's light up once again. That is 
what it really seems like to me, instead of taking into 
consideration how it is we don't need to go see the doctor 
again.
    So I want to ask Chairman Schapiro, there has been a lot 
of--and maybe you don't have this, someone else might have this 
information or an idea. There is this continuing questioning on 
the basis of the cost of the implementation, not of Frank-Dodd, 
but today of the Volcker Rule. And on more than one occasion, I 
have heard this morning, it is going to cost the industry 
billions of dollars in order to implement the Volcker Rule. 
What is your assessment, Chairman Schapiro?
    Ms. Schapiro. We have asked for extensive comment in the 
joint release about the costs of implementation as well as the 
costs and impacts on competitiveness of the Volcker Rule. 
Separately in the Sections that the SEC promulgated under our 
statutory authority, we have asked for specific comment on the 
costs of the compliance program and the reporting metrics, but 
we have also asked about the effect on competition of broker-
dealers, for example, that have to comply with the reporting 
requirements of the compliance program and those that don't, 
the disincentives to engage in market making or underwriting. 
So there is a very, very broad request for comment on costs and 
a request for data from the industry, which is where the data 
would reside to help us be more informed about the costs 
overall.
    Benefits, as you know, are much harder to quantify. Every 
rule has that challenge for us. The benefits to the public tend 
to be general and diffuse, and costs are much more easy to 
identify at least, if not necessarily to quantify. So as we go 
forward, we have to try to balance exactly those things.
    Mr. Gutierrez. How does someone arrive at billions of 
dollars?
    Ms. Schapiro. There are a number of studies that have been 
done recently that seek to quantify the costs. I believe SIFMA 
commissioned Oliver Wyman to do a study that looked at the 
market liquidity impacts of the Volcker Rule and suggested that 
the range could be from $90 billion to $315 billion in loss of 
value for investors as a result of higher interest rates to 
compensate for liquidity risk, higher transaction costs, and 
mark-to-market loss of value. So, that is a pretty wide range.
    It is not clear to me how well-grounded that study is. I 
just don't know. But it is clearly information that we will be 
looking at. I think, again, benefits are always hard to 
quantify. Costs can be easy to identify but then hard to 
quantify.
    Mr. Gutierrez. Mr. Tarullo, do you have any idea, or would 
you care to share with us your thoughts on the cost?
    Mr. Tarullo. As I said earlier, Congressman, I think it 
depends on two things: first, it is going to depend on how 
effective we are in this iterative process of ensuring that 
market making and underwriting and hedging can be done; and 
second, the degree to which straight proprietary trading is 
picked up by other firms.
    One comment, though, on the Oliver Wyman study; it is 
actually a more general comment. I think we all need to be a 
little bit wary of the false precision that sometimes is 
associated with analytic advocacy. If you are asked to do 
something that produces a number, you have to start making 
assumptions. So, they made a bunch of assumptions about how 
liquidity would be affected, a set of assumptions that really 
weren't grounded in any particular explanation. They didn't 
include the possibility that other firms would pick up such 
business as may be lost, and they used as their base period the 
height of the crisis as opposed to a more normal period. So, if 
you relaxed those assumptions or used other assumptions, I 
think you would probably get very different numbers, and that 
is going to be true from any perspective. Whenever anybody does 
analytic advocacy--
    Mr. Gutierrez. So when do you think we--
    Mr. Tarullo. The assumptions you make at the beginning--
    Mr. Gutierrez. When do you think we will know with some 
degree of certainty? One year into it, 2 years?
    Mr. Tarullo. I think when we are a year into the 
conformance period, we are going to have a much better sense of 
how this process is working out, and we will be happy to talk 
with you during that period.
    Mr. Gutierrez. Let me ask you and the chairman, so the 
rulemaking process that we are in, will it be completed and the 
rule in place by January of 2013?
    Ms. Schapiro. It depends very much on the process going 
forward. We have extended the comment period until the middle 
of February. CFTC's comment period goes somewhat beyond that. 
Depending upon what the comments suggest, the extent to which 
we might modify the rule--
    Mr. Gutierrez. Let me just ask one last question.
    Ms. Schapiro. Sure.
    Mr. Gutierrez. Because I enjoy listening to your answers.
    I just want to ask the last question, and that is to Mr. 
Gruenberg. At the FDIC, in the last 2 years, what has been the 
cost to the Federal Deposit Insurance? How much have you paid 
out?
    Mr. Gruenberg. In 2010, we had 157 institutions fail. This 
past year, in 2011, we had 92 institutions. I would have to go 
back and check the exact dollar loss, but it was--
    Mr. Gutierrez. And hundreds failed in 2009?
    Mr. Gruenberg. No, in 2009, 25 failed. So the big failures 
really occurred in--
    Mr. Gutierrez. And what was the cost to the Federal Deposit 
Insurance?
    Mr. Gruenberg. Approximately a $30 billion cost over the 
past 2 years.
    Mr. Gutierrez. Thank you.
    Chairman Garrett [presiding]. And I thank the gentleman. 
Mr. Renacci is recognized for 5 minutes.
    Mr. Renacci. Thank you, Mr. Chairman. And thank you to all 
the witnesses for being here today.
    Chairman Gensler, you stated earlier, in your verbal 
testimony, that the Volcker Rule gives you, you have a twin 
mandate, and risk mitigation but assuring that there is still 
market-making availability. And then later on, you talked about 
a twin goal of making sure there is still market-making 
availability but prohibiting proprietary trading.
    Isn't there a little conflict in that as to how you can 
make sure that there is still market-making availability with 
mitigating risk; and don't you, at some point in time, have to 
determine how much tolerance you can take?
    Mr. Gensler. I think that is correct. I think Congress 
said, let's prohibit proprietary trading in banking entities, 
banking entities that might have availability to the discount 
window or other backing of the taxpayers. To lower risk to the 
taxpayers might bail out these banking entities once again, and 
at the same time, importantly, keep the vital function of 
market making, and that is the challenge that we are all 
addressing in this rulemaking. So, I agree it is a challenge, 
but I think with the help of the public comment period, we will 
get it balanced and get it finalized.
    Mr. Renacci. Okay. And when Ranking Member Frank asked all 
of you, do you believe we can still get market-making, it can 
still occur, Governor Tarullo, you said, ``I think we can, 
based on firm-specific compliance.'' Chairman Schapiro, you 
said, ``I think we can.'' Chairman Gensler, you said, ``We hope 
so.'' And the other two of you didn't get to finish your 
answers, but I assume you are on that same track.
    It leads me to believe that based on everything we know 
today, we are not really sure if we can. Is that correct? I 
would ask for just a ``yes'' or ``no'' from each one of you. 
Based on what you have today--and I know you are bringing in 
all these--the information, you are requesting information, but 
today, as we stand, you would not be able to implement that and 
be affirmative that we can make this happen; is that a correct 
statement?
    Mr. Tarullo. If it were in effect today, without the kind 
of information that Ranking Member Maloney was talking about 
earlier, no, we couldn't do it. But that is exactly why we are 
asking for this kind of information, so that we are able to 
draw appropriate distinctions.
    Ms. Schapiro. I would agree with that. We can do it, but we 
just have to be able to draw the contours correctly, and that 
is why the comment process is so important.
    Mr. Gensler. I would say that it is just a proposal. We 
have been generous, maybe overly generous with 1,300 questions, 
but I think we will greatly benefit from input from 
participants in the markets.
    Mr. Gruenberg. I agree with the points that have been made.
    Mr. Walsh. I think market making will continue. The 
question is, will you restrict legitimate activity if you draw 
the rule too tightly? And that is why we have asked the 
questions, to try to get that right. So, that is where we are.
    Mr. Renacci. Again, and I appreciate what you are doing, 
and I think that is why rushing into something without having 
all the information could be a worse situation than making sure 
that we evaluate this before we do it.
    Chairman Garrett asked a question, and I am just going to 
try and get some more specifics. In regard to joint 
examinations, how are you going to develop a single coordinated 
view of the firm's activities if you have joint examinations 
going? What in advance are you planning to do in regards to 
joint examinations?
    Mr. Tarullo. I can start, but others can chime in. I don't 
think, Congressman, this will be fundamentally different from 
other important regulatory issues when we do joint 
examinations, either the banking agencies among themselves, or 
with our colleagues at the market regulators for broker-dealers 
and commodities dealers; which is to say, you do begin from the 
base of the same regulations, and you understand who has 
primary responsibility, and who has backup authority. But I 
think, more importantly, you try to keep a common understanding 
of the expectations you have for the firms in question. As I 
said, I think that is something that the agencies all learned a 
lot about in the run-up to, during, and after the crisis--and I 
would say, I think, across-the-board that kind of coordination, 
particularly at the largest institutions is substantially 
better than it was a few years ago.
    Mr. Renacci. But you would all agree that, from the 
standpoint of the individual entity, it is going to be almost 
impossible to try and determine which way all of you are going 
if in advance, you don't come up with similar--
    Mr. Tarullo. Absolutely. I think that is why we are--we 
have the contemplation of a compliance plan on a firm-specific 
basis, that any of the--any regulators who have relevant 
jurisdiction can take a look at.
    And just one other thing I would add. On this issue, as on 
some others, because it really disproportionately affects the 
very largest firms, I think we at the Fed are going to make 
sure that we have a pretty centralized way of looking at what 
is going on at all of the major firms, so this won't be 
something that can just go off the rails at individual firms 
around the country. We are going to make sure that our risk 
people here are seeing all the plans and are being able to 
evaluate how it is being implemented everywhere.
    Mr. Renacci. Thank you. I yield back.
    Chairman Garrett. The gentleman yields back. Mr. Watt is 
recognized for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. I actually have several 
questions. I will get through as many of them as I can.
    First, Ms. Schapiro, you referred to a paper that had been 
written by a Stanford University professor in which he 
suggested that higher capital requirements would be a better 
way or a way of dealing with this. If you concluded that were 
the case, would you have the authority under the current 
legislation to accommodate that approach as opposed to dealing 
with this in the way that, under our proposed rule, has been 
proposed? Let me just get all of the questions out, and then 
maybe I will get the answers in the order that I ask them.
    Second, a number of my insurance company constituents have 
raised questions about whether you intentionally exempted or 
whether you intended for an ownership interest in a covered 
fund to be exempted under the exemption for general accounts. 
And to the extent that you can answer that, I would appreciate 
it, Mr. Tarullo, and Mr. Gensler.
    And third, Mr. Walsh, a number of people have raised 
questions about the extent to which businesses or jobs are 
going--would be driven offshore by this set of proposals. And 
perhaps Mr. Walsh, since he hasn't had much to say, could 
address that issue if we have time. So in that order, though, I 
would like to have the responses.
    Ms. Schapiro. I am happy to. First, I want to make it clear 
that I don't agree with Darrell Duffie necessarily. I was just 
trying to respond that there was this alternative that had been 
proposed, but I don't think that we could go that route under 
the statute. I think we are on a path--
    Mr. Watt. So that would require us doing something 
legislatively to--
    Ms. Schapiro. I believe so, and maybe Governor Tarullo may 
have a view about that as well.
    On insurance companies, the statute does exempt from the 
proprietary trading ban trading by an insurance company for its 
general account. But it does not do that for insurance company 
investments in covered funds. In order for us to create that 
exemption, we would have to meet a very high threshold to show 
that it would promote the safety and soundness of the banking 
institution or the financial stability of the United States.
    That said, we have asked questions about it in the release, 
and we have met with a number of insurance companies, I 
believe, and we would welcome their comments and suggestions on 
that, but--
    Mr. Watt. And you intend to clarify that further into the 
process?
    Ms. Schapiro. We will, but we hope to get comment on it, 
because it is quite clear on proprietary trading that insurance 
companies can engage in trading, but not investing in covered 
funds.
    Mr. Watt. Do you agree with that, Mr. Tarullo?
    Mr. Tarullo. I do, Congressman.
    Mr. Watt. And Mr. Walsh, on the driving of business and 
jobs offshore, give me your general assessment of the arguments 
that are being made.
    Mr. Walsh. As Governor Tarullo alluded to, there is a 
question, if certain activities are prohibited in banks, the 
question is, where will that activity go? Some of it may go to 
unregulated entities in the United States, hedge funds and 
others may take up that business. Some of it may go to foreign 
firms in the case of activities that are limited. It is not 
unusual to have prohibitions, limitations, capital charges, and 
other features of the regulatory framework, so we are creating 
some such limitations, and that business will presumably 
migrate elsewhere.
    Mr. Watt. But I assume the extent to which that migration 
will take place will depend on the extent to which you all get 
this rule right or adjusted?
    Mr. Walsh. It will, but to the extent that there are 
certain things that are clearly prohibited, that activity will 
no longer be in banks; it will move elsewhere.
    Mr. Watt. All right. I think I got all three of my 
questions asked and answered in my 5 minutes, so I will yield 
back.
    Chairman Garrett. That is always a good record if you can 
do that. Very good. The gentleman from New York is recognized 
for 5 minutes.
    Mr. Grimm. Thank you, Mr. Chairman.
    I will ask Chairman Schapiro first. If the rule as proposed 
does not limit liquidity, does not increase the spreads, does 
not increase the cost of doing business, why would we need an 
exemption for treasuries and municipalities for their municipal 
securities?
    Ms. Schapiro. I believe the exemption is really premised on 
the idea on the municipal side that it doesn't raise the same 
kinds of concerns about short-term trading that other 
proprietary trading does, and so the statute exempted 
government obligations generally from the proprietary trading 
ban. But I understood in your opening comments a concern to be 
that we have construed that too narrowly, to only include the 
obligations directly of the State or State agency and not, for 
example, the Turnpike Authority or other political 
subdivisions. And we have flagged that in the proposal and 
sought comment directly on whether we should use a broader 
definition of government obligations, like the definition of 
municipal securities under the 1934 Act to provide a broader 
exemption.
    Mr. Grimm. Okay, thank you. If we have a small or mid-sized 
company that needs access to liquidity, short-term cash flow, 
and they want to float $25 million of commercial paper and they 
go to a brokerage firm to do this, and the firm says, well, we 
can place $20 million right away, we have that, but the other 
$5 million we are going to have to hold it and work it over the 
next week or so, would that transaction be considered a 
proprietary trade for that broker-dealer, Mr. Tarullo?
    Mr. Tarullo. I think you are touching here on the 
underwriting exception, and the specifics would obviously 
depend on the kinds of practices that are necessary to 
underwrite. As you know, when an investment bank underwrites an 
issue, it does often take some risk if it pulls into its own 
inventory the uncommitted securities.
    Mr. Grimm. And that is the scenario I am giving you. They 
place 20, they can't place the other 5, they are going to work 
it. This happens every day. So, it is not some--
    Mr. Tarullo. Yes. So I don't want to--one always is 
hesitant to address any specific hypothetical because others 
will take it. But I will say the whole point here is to look at 
the kinds of practices in underwriting that are conventional so 
that conventional underwriting can continue to be performed, 
and that, again, will be part of the process of the firm-based 
compliance and the kind of metrics that we get. And if you are 
talking about a situation that is similar to what we see every 
day, presumably that would fall within the exception, and we 
will give that clarity to the firms going forward.
    Mr. Grimm. Okay. My understanding, though, is that we are 
leaning towards looking at if--to try to decide whether 
something is proprietary or not, it is my understanding--and I 
could be dead wrong, please correct me--that if the firm is 
making most of their money on fees, on spreads, but not on the 
value increasing over time, then it is not proprietary trading. 
But in this case scenario, if they are working a position, they 
very well may make more money because the value could go up in 
that week.
    Ms. Schapiro. If I could just elaborate. I think when a 
broker-dealer purchases securities from the issuer with the 
purpose of reselling them, if not immediately, in a reasonable 
period of time, to the public, that is clearly in furtherance 
of underwriting and would be permissible under the rule.
    Mr. Tarullo. Yes. It is important to make the point here, 
Congressman, with respect to underwriting or market making, the 
fact that a firm will in some instances make money because of a 
short-term price movement does not in and of itself make it a 
prohibited trade.
    Mr. Grimm. That is what I want to make sure of.
    Mr. Tarullo. Right. The point is, is it market making, is 
it underwriting? And of course, the underwriter takes a risk 
that the market likes the issue less 2 weeks after issuance 
than beforehand.
    Mr. Grimm. Exactly. Okay, very good. If a non-U.S. firm 
ultimately sells a security to a U.S. institution, a 
proprietary, the non-U.S. entity definitely did a proprietary 
trade and ultimately sells that security to a U.S. institution, 
does that fall under the purview of U.S. regulators? Is that 
subject to the Volcker Rule?
    Chairman Garrett. And we will make this the final question.
    Mr. Grimm. Final question. Chairman Schapiro?
    Mr. Tarullo. Can you give us the facts again?
    Mr. Grimm. Okay, sure. We have a non-U.S. entity with non-
U.S. subsidiaries doing proprietary trades. Let's just say they 
bought whatever security, they have held it, it has 
appreciated, and they now sell that appreciated security that 
they have a proprietary profit on to a U.S. entity. Does that 
fall under the Volcker Rule? Are we going to try to enforce 
these rules--
    Mr. Tarullo. And they have been doing that overseas, 
Congressman? Sorry.
    Mr. Grimm. Right.
    Ms. Schapiro. I believe, and I would like to confirm this 
for you, that if the foreign banking entity sells to a U.S. 
customer, they lose the exemption from the Volcker Rule.
    Mr. Grimm. Right. And so, that begs the question, how do 
you plan on enforcing Volcker on non-U.S. entities, and would 
that not drive business to non-U.S. entities if they are not--
you are saying they are not subject to the exemption.
    Chairman Garrett. The gentleman's time--
    Mr. Grimm. Okay.
    Chairman Garrett. And I say that because it was a great 
question and a good point, but I understand now that the panel 
is leaving at noon, so we are going to try to get as many 
people in as we can, so we will try to adhere to the 5-minute 
rule.
    The gentleman from Texas, Mr. Hinojosa, is recognized for 5 
minutes.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    I ask unanimous consent that my opening statement be 
included in today's--
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Hinojosa. I want to make reference to an article that 
appeared in today's--January 18th--Bloomberg News saying that 
the attack by lobbyists for U.S. banks is seen as exaggerating 
the cost of disruption to the bond markets.
    We have been discussing this morning the proposal 
championed by former Federal Reserve Chairman Paul Volcker. 
According to the article, it says that the lobbyists are saying 
that it will constrain the largest banks from betting on--
sorry--anyway, this article says that their fears are greatly 
exaggerated. The industry's claim ignores the fact that when 
the largest banks stop doing this kind of trading--and I'm 
reading from that article--that somebody else will step in to 
do it, and we have to weigh those costs against the risk of 
banks blowing up.
    This discussion has been very interesting; and I want to 
ask a question as it refers to the smaller institutions, 
community banks and credit unions in particular, because they 
didn't cause the recent economic decline. Some fear that 
additional regulations will harm the smaller financial 
institutions that arguably serve currently as the foundation of 
our Nation's economy.
    It is my understanding that Section 619's prohibitions on 
proprietary trading do not apply to small business investment 
companies known as SBICs, allowing for banks to invest in them. 
So I ask my first question, which is, does the Dodd-Frank Act 
and proposed rulemaking provide other exemptions that benefit 
small business resulting in job growth?
    That first question is for Governor Tarullo of the Federal 
Reserve System.
    Mr. Tarullo. Thank you, Congressman.
    I think probably from the standpoint of a small business or 
medium-sized business, somebody who has access--would normally 
have access to public capital markets, probably the most 
important thing is the line of questioning that we were engaged 
in a few minutes ago, which is to say making sure that the 
underwriting exception is interpreted and applied in such a 
fashion that they are able to get underwriting services. 
Because sometimes the issue of a smaller firm will be less 
liquid than that of a larger firm and they are going to want to 
know that the underwriter can in fact hold the inventory as 
appropriate and then sell it later.
    I think that is probably the most important thing in 
addition to the SBIC exception that you referred to a moment 
ago.
    Mr. Hinojosa. I will ask the same question of Chairman 
Gruenberg of the FDIC.
    Mr. Gruenberg. I agree with the point Governor Tarullo 
made, and I also think it is worth noting that in terms of 
small banks, community banks, they by and large don't engage in 
this activity and should not be impacted directly by the 
Volcker Rule. The activity is really principally by our largest 
financial companies.
    Mr. Hinojosa. Thank you.
    The Comptroller of the Currency, John Walsh, what is your 
answer?
    Mr. Walsh. I agree with what has been said. It is also the 
case that public welfare investments that banks make in 
community projects are also exempted.
    Mr. Hinojosa. Very good.
    The U.S. Chamber of Commerce will testify in the second 
panel, and they contend that the Volcker Rule as currently 
constructed will not reduce systemic risk nor will it improve 
economic well-being, but will in fact increase systemic risk. 
Governor Tarullo, what concerns address the possibility that if 
the Volcker Rule were implemented, banks would be unable or 
unwilling to underwrite public and private bonds for 
corporations, municipalities, health care providers, and our 
universities?
    Chairman Garrett. We will have that be the last question. 
The gentleman can answer.
    Mr. Tarullo. Again, going back to what I said a moment ago, 
Congressman, that the intentions with respect to the 
underwriting exception are quite clear to make sure that 
underwriting can continue to be pursued as appropriate.
    Chairman Garrett. I thank the gentleman. The gentleman 
yields back.
    Mr. Luetkemeyer is now recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Gruenberg, in our work papers here and briefing papers 
there is a statement that says that Chairman Volcker has argued 
that activities such as proprietary trading and sponsoring 
hedge funds and private equity funds should not be conducted by 
firms that benefit from a Federal safety net such as deposit 
insurance or access to the Federal Reserve System discount 
window. Proponents of the rule have argued that by moving 
certain risky non-core activities out of institutions that 
benefit from deposit insurance and access to the window, 
restrictions would better protect taxpayers and help create a 
more resilient U.S. banking system. What is your reaction to 
that statement?
    Mr. Gruenberg. I think the underlying premise to the 
proponents is that the activity here is speculative short-term 
trading--
    Mr. Luetkemeyer. Right.
    Mr. Gruenberg. --relying on funds that are generated as a 
result of the public safety net of deposit insurance and access 
to the discount window. I think that is, for the proponents, 
the key issue, and that is why they want to constrain that 
activity, that it is inappropriate to, in effect, engage in 
speculative trading activity utilizing funds derived from the 
public safety net.
    Mr. Luetkemeyer. A while ago, I think Mr. Gutierrez asked 
you a question about the costs to the FDIC insurance fund over 
the last several years. You gave a $30 billion cost to the 
failures. What proportion of that would you say would be as a 
result of the kind of activities that we are talking about this 
morning, that the Volcker Rule would affect?
    Mr. Gruenberg. I don't know that you can discern from the 
failed institutions that there is a relationship to proprietary 
trading activities.
    Mr. Luetkemeyer. Out of the banks, the 200 banks that 
failed in the last couple of years, I am sure a lot of those 
were community banks, which you just testified weren't part of 
the problem. Of the bigger folks that have caused some 
difficulties for the other banks--obviously, the big banks were 
consolidated and a lot of them didn't fail as a result of the 
too-big-to-fail doctrine, but there are a lot of folks who were 
inadvertently affected by this. No figures on that? No guess?
    Mr. Gruenberg. In terms of tying it to the proprietary 
trading activity, I think it has--
    Mr. Luetkemeyer. I think there are hedge funds and private 
equity funds, too. This is what the Volcker Rule was addressing 
here. That is why I read the whole question.
    Mr. Gruenberg. I think the proponents--and that includes 
Mr. Volcker--have indicated that they view the proprietary 
trading restriction essentially as a forward-looking--
    Mr. Luetkemeyer. How much risk do you think is appropriate 
for the banks to take on utilizing these instruments? Do you 
think there should be a different weighting of this when you 
start looking at adequate capital with regards to the size of 
the institution, the amount of activity they have? Are there 
certain criteria that you think would be necessary there?
    Mr. Gruenberg. The Volcker Rule is focused on the question 
of what mechanism you want to use to try to address the risk 
identified here.
    One approach would be capital requirements relating to 
these activities. Another, which is really the statutory 
provision in Section 619, goes to constraints on the activity 
itself. There are two alternative approaches. I think the 
statute chose the latter.
    Mr. Luetkemeyer. I am running out of time here. I have two 
more questions I want to get to.
    One is--Ms. Schapiro, you and I have discussed this before. 
It is a little bit off the topic here. But it is with regard to 
activities with regulatory stuff coming from different 
departments. The Department of Labor issued a proposed ruling 
on the definition of fiduciary. Have you been working with the 
Department at all on this issue and can you give us a quick 
update in about 15 seconds?
    Ms. Schapiro. We have had a number of conversations and 
discussions with them. As you know, they are interpreting their 
rules under ERISA.
    Mr. Luetkemeyer. Are you working with them and making sure 
that your point of view and your oversight over this is not 
impacted?
    Ms. Schapiro. Yes, we have had a number of conversations.
    Mr. Luetkemeyer. Mr. Tarullo, you were trying to address 
with Congressman Grimm here a minute ago with regards to the 
question he had on enforcement of these foreign entities who 
are dealing with proprietary trading activities. I thought it 
was a great question, and we didn't get an answer. Would any of 
you like to jump in here, how is enforcement mechanism going to 
work on folks who are offshore who are doing business here? Can 
you explain the oversight on that?
    Mr. Tarullo. If they have a subsidiary or branch or an 
agency here in the United States--
    Mr. Luetkemeyer. In order to sell here, they have to have a 
branch or subsidiary?
    Mr. Tarullo. Well, no, that wouldn't necessarily be the 
case, Congressman. It could be they had a branch which was 
unrelated directly to the proprietary trading but that is still 
an avenue in for enforcement because you have jurisdiction over 
the entity. If it is purely an entity overseas, there could be 
a jurisdictional question of what kind of--
    Mr. Luetkemeyer. In other words, if an entity overseas is 
doing business with an individual or a company here and selling 
these types of--or doing these activities back and forth, is 
there a question of jurisdiction, who would be able to enforce?
    Chairman Garrett. That will be the last question.
    Mr. Tarullo. Well, remember, the firms we are going to 
primarily be concerned with are those that are operating in the 
United States and they would have one of the subsidiaries or 
agencies or branches that I referred to a moment ago.
    Mr. Luetkemeyer. Thank you very much.
    Thank you very much, Mr. Chairman.
    Chairman Garrett. The gentleman's time has expired.
    Obviously, we will have some other questions that we will 
probably want to submit to the panel in writing.
    The gentlelady, Mrs. McCarthy, is now recognized for 5 
minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman, and I 
thank the witnesses for their patience.
    When you start thinking about these committee hearings, you 
think about what questions you want to ask, and of course when 
it gets down to you, most of the questions you wanted to ask 
have already been asked. But I would like to talk about the 
aspect of the implementation that is equally important, part of 
the whole process that we are on right now, and that is making 
sure that the agencies have the staff but also who have the 
knowledge. I know we had a hearing several years ago, and one 
of the things we found out is that a lot of your agencies 
didn't actually have the expertise of having someone who worked 
in compliance on Wall Street and knew what to look for and 
things like that. I am wondering if that has changed?
    And what additional resources might you see a need for in 
the future as far as staff, and do you anticipate that you are 
going to need to perform the duties--are you going to be able 
to have the staff that you need to perform the duties that you 
are talking about? Because with all of you sitting here, we 
know that there will be a heck of a lot of staff behind you 
also doing that work.
    As far as the money--the market making, when you conduct 
your warranted exams, what happens when each and every one of 
you come together? How are you going to analyze the data if you 
have different opinions? Who takes the lead on coming down with 
the final decisions?
    Mr. Gensler. I am going to take the opportunity to say at 
the CFTC, no, we do not have enough staff. We have been asked 
to take on a market 7 times the size of the futures market, a 
$3 trillion swaps market. So I am hopeful as it relates to the 
Volcker Rule that we can leverage off of this to some of the 
agencies at this table who are, frankly, self-funded.
    I think that is why I am being pragmatic about this. If it 
is a swap dealer or Futures Commission merchant that is part of 
a broader banking entity, at the CFTC, we are going to look to 
be efficient by leveraging off of some of the examination 
authority at the banking authorities.
    Mr. Tarullo. I would say, we may be self-funded, but we 
don't regard ourselves as having a blank check. I think the 
entire government is aware of the need to conserve resources. 
What the needs will be over time, I think we will have to wait 
and see.
    One thing I will say, though, is that right now there is an 
awful lot, obviously, of staff time being devoted to drafting a 
lot of regulations, Dodd-Frank regulations, Basel-Committee-
derived regulations, and the like. And I would anticipate that 
once that process--doesn't come to an end, exactly, but once it 
slows down and the peak levels of activity have diminished 
some, we will be able to redeploy people.
    But you made a critical point, I think, in the premise of 
your question, which is having the right kind of people to 
implement and administer not just the Volcker Rule--
    Mrs. McCarthy of New York. All of the rules.
    Mr. Tarullo. --but the kind of supervision we do know.
    This is not just an advanced form of making sure that loans 
are underwritten properly. It requires a set of skills and 
expertise that are different.
    And a point on coordination--as I said earlier, I think we 
are actually coordinating in general quite well both with 
respect to rule writing and with respect to individual 
supervision. Every agency does have to fulfill its statutory 
mandate. We have primary responsibility for the institutions 
that are assigned us by the Congress.
    But, for example, if we are doing a holding company with a 
big national bank, the supervisors from the Fed and the OCC 
routinely--and by routinely, I mean daily--consult with one 
another, and if there are differences of views on policy 
matters, they are both expected to push those up the line 
where, if necessary, eventually, John and I will discuss them.
    Mrs. McCarthy of New York. Thank you.
    Ms. Schapiro. For the SEC, we will obviously be responsible 
for broker-dealers and security-based swap dealers that are 
affiliated with depository institutions; and so, I would 
imagine that we will rely heavily, as the CFTC will, on the Fed 
and the bank regulators to take the lead. But, we obviously 
have a key role to play with respect to the broker-dealers. I 
do think the standardization of the metrics and the data will 
enable all of us to see the same information and work together 
very closely on our different components of the banking 
entities.
    Chairman Garrett. The gentlelady's time has expired.
    The gentleman from Texas has a letter from the Small 
Business Investor Alliance (SBIA) which is to be entered into 
the record.
    Mr. Hinojosa. Yes, I ask unanimous consent that the SBIA 
letter--
    Chairman Garrett. Without objection, it is so ordered.
    The other gentleman from Texas is recognized for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    As I said in my opening statement, we sent you a letter 
from 121 Members of Congress, and that was a bipartisan letter. 
A number of committee chairmen signed that letter.
    And you know when you look at--I pulled up a copy of Dodd-
Frank a while ago. It was 11 pages for this Section in Dodd-
Frank, and it has turned into 300 pages of regulation and 1,300 
questions that you put out for part of your rule. When somebody 
starts asking a lot of questions, it leads me to believe that 
there are some conclusions that were not drawn prior to the 
rule coming out.
    And when you look at--the current estimate is 6.2 million 
manhours to comply with this piece of legislation. We have 
other countries saying that they are not going to go in the 
same direction as Dodd-Frank. So, it obviously creates some 
bifurcation in the marketplace.
    Back to the letter we sent you, as I mentioned, we 
mentioned three things, one was to extend the comment period. 
But, more importantly, after asking all of those questions and 
receiving answers to 1,300 questions and 400 issues, there 
appears to be at least one conclusion, and that is that you are 
going have to go back and re-think and re-look at those 
different issues after you have had those questions answered 
and send the proposal back out and see if everybody then is on 
the same page. Is there disagreement that is not a good 
strategy, Mr. Tarullo?
    Mr. Tarullo. I think it depends, Congressman, on the 
answers that we get to the questions that have been asked.
    And, as I said earlier, as is the case I think in all 
administrative rulemakings, the pattern is you look at the 
responses that have come in and you make an assessment as to 
whether you need to adjust your proposed rule at the margin or 
whether you need to make some significant changes that don't 
fundamentally affect the structure of it or whether you need to 
change the structure of it. And I think that what will happen 
is, once the comment period has ended, we are all looking at 
the staffs and we are all looking at the comments, and we will 
need to make an assessment as to which of those three 
categories we are in.
    I would say if we were in a category in which we thought we 
had to change the basic approach, then one would expect that a 
re-proposal would probably be what you do. But if, on the other 
hand, you are making adjustments to the basic approach that you 
have made, we may well not feel the need to re-propose the 
regulation as opposed to making changes but then go final and, 
as I said earlier, have the opportunity for further refinement 
during the conformance period.
    Mr. Neugebauer. Ms. Schapiro, have you ever seen a rule 
that had 1,300 questions in it?
    Ms. Schapiro. I can't say that I have. I have seen rules 
and we have done rules at the SEC where we have asked hundreds 
of questions to inform our process. The goal of the questions 
was not to give everybody out there who is commenting lots of 
work to do, but to really help inform us about how to draft 
this rule, and these exemptions in particular, correctly. So, 
it was really our effort to make sure we covered all the bases.
    Mr. Neugebauer. Mr. Gensler, have you ever seen a rule with 
1,300 questions?
    Mr. Gensler. I don't know that I have. As I say, while we 
may have been overly generous, it really is to solicit public 
input on a challenge here of how to achieve these twin goals of 
prohibiting one thing, permitting another thing, the two 
overlap, and so how to deal with that overlapping, fulfill 
congressional intent to lower risk to taxpayers.
    But to the chairman and subcommittee question earlier, and 
your chairman as well, to the two chairmen, we have been 
willing at the CFTC to re-propose on a number of occasions when 
it is not a logical outgrowth, and if that is the collective 
view at some point this spring or summer when we are getting to 
that point we would--
    Mr. Neugebauer. Isn't the goal here to do this right?
    Mr. Gensler. Absolutely. Do it right, in a balanced way to 
fulfill congressional mandates.
    Mr. Neugebauer. And so with something as important as this, 
it seems to me that we should make sure we get it right. I 
think the question that a lot of people are asking is, what in 
this new rulemaking process, this 300-page rule, would have 
prevented the financial crisis from transpiring?
    Mr. Tarullo, can you point to a Section?
    Mr. Tarullo. There are a couple of things, and some people 
alluded to this earlier. First, yes, there was some proprietary 
trading. Would I identify it as at the core of what led to this 
financial crisis? No. But one is always enjoined not to fight 
the last war as one goes forward, and so I assume that the 
motivation was to address other issues. And if you don't have a 
balanced book, obviously, you have more risk in one other than 
you otherwise would.
    I want to say one more thing on the questions, and the 
questions are in the 300 pages. There are a lot of questions. 
But part of what the questions do actually is to reveal to the 
public how we have been thinking about the rulemaking. They 
don't have to answer--you can send in a one-page comment or you 
can send in a 100-page comment. It is not like one of my old 
law exams where the kids had to answer everything whether they 
wanted to or not. This is one where you pick the questions you 
want to answer.
    But I do think they actually serve a transparency function 
as well by giving an insight into the way in which we are 
debating within the agencies.
    Chairman Garrett. That will be the last question that this 
gentleman asks.
    Mr. Miller is recognized now for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    There has been some question in this committee about 
whether propriety trading played a role in the financial 
crisis, but one thing that obviously did play a role was the 
repo market, the repurchase market. The repurchase market is 
largely still unregulated, it is opaque, dimly understood 
certainly by Congress and by the public, and huge. At the time 
of the crisis or just before, it was the equal of all deposits 
and lent itself to great instability by matching up short-term 
borrowing with longer-term lending.
    Before the crisis, Bear Stearns was borrowing $40 billion 
overnight in the repo market and using those funds to purchase 
mortgages. So, that obviously creates a great deal of 
instability. Yes, it creates liquidity, but it also creates a 
great deal of instability.
    I understand that there is an exception in the proprietary 
trading rule designed to get at repo lending, the repurchase. 
That if you take a security as collateral, even though it is 
characterized as a purchase, if it is in fact a loan with 
collateral, that is not treated as proprietary trading. I want 
to find some ways to get at the repo market and the instability 
that it creates, but I think that rule probably makes sense.
    Sheila Bair and others have suggested that the way the rule 
is written, it will also exempt purchase of assets financed 
through the repo market. MF Global--you are shaking your head; 
I am glad to see that--was using a financing technique called 
``repo-to-maturity.'' They were buying European sovereign debt 
with the European sovereign debt as the security, as the 
collateral for the purchase. It was basically 100 percent 
financing.
    Sheila Bair and others have suggested that the rule would 
in fact allow that and not treat that--if done by an 
institution subject to the proprietary trading rule, it would 
have exempted that.
    Mr. Tarullo, you have already shaken your head ``no.'' Do 
you not read the rule that way?
    And I would like to hear from the others as well.
    Mr. Tarullo. I think you have it exactly right on all three 
counts, Congressman.
    One, the repo exception is meant to recognize the fact that 
it is essentially a borrowing relationship. It is not a trading 
relationship, even if title passes back and forth.
    Two, if the repo is the financing, what you do with the 
financing, whether you get the financing from deposits or from 
long-term bond issuance or from repo, what you do with it is 
what the Volcker Rule addresses. So, short-term trading for 
proprietary purposes, whether you financed it through deposits 
or through repo or through a long-term bond, it will still be 
prohibited.
    The third thing you got right is MF Global would not have 
been subject to this because they don't have a depository 
institution.
    Ms. Schapiro. I was going to add that I agree with all of 
that completely, that had they been associated with a 
depository institution, the fact that they were engaged in repo 
would not change the character of the underlying purchases of 
the sovereign bonds. And assuming those were not done pursuant 
to market making or underwriting, they would likely have been 
proprietary trading and prohibited.
    Mr. Miller of North Carolina. Does anyone disagree?
    Do any of you think there should be some limitation on the 
repo market? We had a hearing in the Oversight Subcommittee of 
this committee on MF Global--of course, there have been a lot 
of hearings in Congress--and certainly one of the lessons I 
took from that hearing was that the repo market, although we 
have heard testimony in this committee that it is now vastly 
changed from what it was before the crisis, is still a 
remarkable source for instability. I think the assumption in 
Europe is that things will get really chancy for the financial 
system when there is a fault. I suspect things will get really 
chancy when the repo market starts requiring a lot more 
collateral for sovereign debt when sovereign debt is used as 
collateral.
    Mr. Tarullo, is there any regulation in the works?
    Mr. Tarullo. We certainly have been looking at the repo 
market in the context of wholesale funding and what is 
sometimes referred to as the shadow banking system more 
generally. If you think about it, there are really two big 
goals that I think regulatory reform post-crisis needed to 
have. One was the too-big-to-fail issue where we have made some 
progress. We are not there yet, but I think we have the tools 
in place to do it.
    The second is in wholesale funding more generally in the 
areas in which there is a potential for runs under 
circumstances in which the value of collateral all of a sudden 
becomes a question to those who have been taking it.
    Chairman Garrett. The gentleman's time has expired.
    Mr. Tarullo. With respect to all of these, you will need 
more attention. Sorry.
    Chairman Garrett. The gentleman's time has expired.
    The gentlelady from New York is recognized.
    Dr. Hayworth. Thank you, Mr. Chairman, and I thank all of 
the panelists. With great respect for the little time 
remaining, during this hearing it has been most impressive that 
all of you take a very thoughtful and thorough approach to this 
almost seemingly impossible task, and I give you great credit 
for that.
    But clearly, as Chairman Neugebauer has indicated, it seems 
as though it would be very reasonable to consider that this 
rule, this proposal is not what, as a scientist, being a 
physician--it is not the most elegant solution to the problem 
that we face, which is that we have certainly put taxpayer 
dollars at great risk and we have expended an enormous amount 
of taxpayer money to rescue financial institutions that have 
acted unwisely. The causes for that or the conditions that have 
been conducive to that kind of action of course are at the crux 
of this problem. I think those of us who feel Federal 
intervention in the markets has augmented the moral hazard 
would automatically take a different approach.
    Would any of you be willing to say that statutorily, it 
would be appropriate for us to give very serious consideration 
to legislation that removes this particular burden, and perhaps 
we should direct our legislative efforts toward again a more 
elegant solution such as really strictly limiting the 
circumstances under which we will indemnify institutions for 
losses?
    Mr. Tarullo. I can start. I think too-big-to-fail is an 
agenda, and the moral hazard that comes from it is an agenda 
that we should all share and we should all pursue, regardless 
of what happens in other areas.
    Having said that, there are going to be major consequences 
to the financial system if a major financial institution fails, 
even if it does fail and is resolved by Chairman Gruenberg and 
the FDIC in a way that does not involve the expenditure of 
taxpayer funds. So financial instability and harm to the system 
can result even if you are not in a position of bailing out a 
firm.
    And I think with respect to capital and other rules, that 
is part of the motivation of thinking as to how we are going to 
both move towards a situation of more market discipline, 
avoiding too-big-to-fail, and to in an anticipatory fashion 
mitigate the consequences that would ensue even from the 
resolution as opposed to bailout of a major financial 
institution.
    We are moving forward now on implementation. We are waiting 
for the comments to see whether there is a better approach. 
Although, as I said in my prepared remarks, I haven't seen it 
yet. I welcome it if it does come, but someone has to elaborate 
it.
    The only thing I would say to you is, as we go through--
assuming we go through with this framework and this approach, 
as we go through the conformance process, if there are things 
that we think would need legislative attention, we will 
certainly come back to you.
    Dr. Hayworth. But it seems clear, especially from 
Representative Grimm's question, that we are--and we can't deny 
the fact that we are in a competitive global marketplace, and 
that certainly creates great challenges for our financial 
services sector as we try to compete, as we have U.S.-based 
companies competing with those that are based overseas. That 
has to be a concern for all of you as you--
    Mr. Tarullo. Sure, absolutely. That is why we paid as much 
attention as we did in the capital area which I think is 
critical to making sure not only do other countries adopt Basel 
3 but that they actually implement them in their firms in a 
rigorous fashion so their risk weighting is done like ours. So 
I agree with that proposition.
    It is a little different, though, to ask the question, does 
every country need to have exactly the same regulations for all 
of its firms. And some other countries don't have--they put 
constraints on their firms in ways that we don't. So, we have 
to make a judgment I think collectively as to whether this is 
something that goes to the heart of the ability of a big 
international financial firm to compete.
    Chairman Garrett. The gentlelady's time has expired.
    I understand this panel was told that they would be out of 
here by noon. With the panel's permission, I would like to have 
an even number from both sides of the aisle to be able to 
question the panel. Mr. Scott has just come in, and I recognize 
him for questions.
    Mr. Scott. Thank you, Mr. Chairman, for that time.
    I want to share with the committee my major concern with 
the implementation of the Volcker Rule. This is not whether or 
not we should do it, but it is to make sure we do it right.
    I am very concerned. We are moving forward in a very, very 
strong economic recovery period. The unemployment level has 
come down to 8.5 percent. We have increased jobs just last 
month in the private sector of 200,000 jobs that have come on. 
Auto sales are up. We have General Motors moving from the 
doorsteps of bankruptcy now to we have them pivoted right back 
up to the top as being the number one automobile manufacturer 
in the world, passing Toyota. Great signs, which means consumer 
confidence is going up and business confidence is going up.
    This Volcker Rule goes at the central nervous system of our 
entire financial system and could really have a devastating 
impact, in my opinion, if it is not done right, because the 
general thrust of this Volcker Rule is in capital formation, 
which clearly impacts the whole question of liquidity. So as we 
move forward with this interpretation of this rule, let us keep 
in mind that we do not want to do anything that would get us 
off course from the great upward movement we are making in our 
economic recovery.
    I have two central questions. First of all, Ms. Schapiro, 
one area--it touches every area, but one of the areas that we 
talked about is in the swaps and in the hedging. And I want to 
commend you, first of all, for meeting with and the work that 
you have done with the IntercontinentalExchange. That is 
particularly within the portfolio margining requirement for 
clearing members. I commend you for that, and I hope you will 
proceed in extending that margining of portfolios for customers 
as well, because I would think it would help.
    But I understand there is a pending request before your 
Commission for an exemption to permit the commingling of 
security-based swaps with index-based CDS's in an account 
overseen by the CFTC. Here is how this little wrinkle works, 
for example. Has your staff made any progress on this request 
or identified any policy issues that stand as an impediment to 
granting this request, which I understand is critical to 
ensuring the buy side utilize central clearing for these same 
products? And this is particularly in fact because the CFTC has 
an impact on this as well. How does that work between the two 
of you?
    Ms. Schapiro. Congressman, I am going to have to get back 
to you--I am sorry--for status from my staff on exactly where 
those conversations are, but Chairman Gensler may have more 
information.
    Mr. Gensler. If I could take it, the two agencies are 
working together on swaps and securities-based swaps 
regulation. In this one area that you mentioned, credit default 
swaps, where narrow based and individual swaps are the 
jurisdiction of the SEC and the index steps are over at the 
CFTC, I share the goal that you mention, that market 
participants can get the benefit of central clearing and the 
benefit of portfolio margining. And, of course, the devil is in 
the detail because of the two statutory regimes. But I know 
staffs have been working together with market participants on 
how to achieve that, and the CFTC, I believe, is committed to 
do that. I haven't heard of a concern from the SEC, but, given 
the capacity of all that we are doing, your highlighting helps 
just to remind us to keep attention on it.
    Mr. Scott. Thank you so much.
    My time is getting short, but back to my general concern 
about the overall health of this economy, making sure that we 
get this rule right so it doesn't interfere with the great 
progress we are making in the economic recovery, there are some 
studies that have shown there could be a significant impact on 
U.S. companies, particularly our financial companies, in 
increased borrowing costs if the Volcker Rule is not 
implemented the right way. Now, given the complexity of this 
task, the significant downside of getting it wrong and the fact 
that the CFTC just released its rule, what is the downside of 
taking comments and re-proposing with greater clarity based on 
these comments?
    Mr. Tarullo. As I said earlier, Congressman, I think 
whether we do that or not will depend on the assessment we make 
of the comments we have received. If there is not a 
fundamentally different track down which to head, then I think 
it would actually be in everyone's interest, including the 
firms, to have a sense sooner rather than later what the rule 
will look like.
    If, on the other hand, we do think that we need to change 
fundamentally--I haven't seen it yet, but--
    Mr. Scott. Do any of you believe that in the process of 
interpreting this rule and putting it in place, there is a 
downside to it, having a negative impact on the great advances 
we are making with our economic recovery, especially in the job 
creation?
    Mr. Tarullo. I think if, as you say, the rule is 
implemented properly--and that is probably most importantly 
focused on making sure that the underwriting and market-making 
functions are able to proceed in a productive fashion--then, we 
shouldn't see that kind of impact.
    Might we see some shifts from one firm to another in, for 
example, being able to run a proprietary desk? Yes, I think we 
may see some of that. But that was the congressional judgment 
that that kind of proprietary trading in a firm with a 
depository institution was not necessary for the firm itself 
and raised certain financial stability risks. If we do 
underwriting and market making right, I think that the capital 
flows with which you are most concerned are going to be 
preserved.
    Mr. Scott. Thank you very much.
    Chairwoman Capito [presiding]. I am going to conclude the 
first panel. I want to thank the witnesses. I think you 
answered some great questions and have been very forthright, 
and I appreciate it. Thank you.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    I will call the second panel up as soon as they are able to 
switch places.
    If I could ask everyone to take their seats, and we will 
proceed.
    At this time, we have the second panel of witness before 
us, and I will introduce them individually. I understand 
Congresswoman Hayworth will make an introduction, which I will 
save until we get to your constituent.
    Our first witness is Mr. Anthony J. Carfang, partner, 
Treasury Strategies, Inc., on behalf of the U.S. Chamber of 
Commerce.

  STATEMENT OF ANTHONY J. CARFANG, FOUNDING PARTNER, TREASURY 
  STRATEGIES, INC., ON BEHALF OF THE U.S. CHAMBER OF COMMERCE

    Mr. Carfang. Thank you, Madam Chairwoman, and members of 
the committee. We are pleased to speak to the committee today 
on an issue of such profound importance to the stability of the 
financial system.
    My name is Tony Carfang, and I am a partner at Treasury 
Strategies. We are the world's leading consultancy in the areas 
of treasury management. For 30 years--in fact, today is our 
30th anniversary--we have been working with corporate 
treasurers and CFOs, helping them manage their daily cash flows 
and growing their businesses.
    We also consult to the financial institutions who provide 
treasury and liquidity services to those corporations.
    We are speaking today on behalf of the U.S. Chamber of 
Commerce, its 3 million members, and the 3 million treasurers 
of those companies who will have to deal with these 
regulations. And what I would like to do today is share with 
you the untold story of how these regulations will impact the 
daily management of America's businesses. As a matter of fact, 
there are five points I would like to make here, five chapters 
to this story.
    Number one, American businesses are the most capital-
efficient in the world, and the Volcker Rule will change that.
    Number two, as every treasurer knows, risk can neither be 
created nor destroyed, only transformed. And while the Volcker 
Rule may remove this risk from the banking system, it puts it 
right in the lap of every U.S. corporation.
    Number three, the rulemaking process that you were 
discussing earlier is so unaligned in terms of the comment 
periods and in terms of the implementation, that it further 
adds to the uncertainty and increases the possibility that all 
except the largest banks will either scale back or reduce the 
number of services they offer altogether.
    Number four, this is one of four major pieces of regulation 
impacting corporate treasurers along with Basel, along with 
proposed additional money market fund regulations, and along 
with derivatives regulations, all four of these designed to 
impact financial institutions, but frankly landing right on the 
desk of every corporate treasurer in America.
    Number five, there are no do-overs here. Corporate 
treasurers will be realigning their balance sheets, 
reprogramming their ERP systems as they change banks and change 
the way they manage risk and raise capital. Those are long-term 
changes. Now, it may take 12 to 18 months for even a mid-sized 
company to make these changes, and once made, they are not 
going to be easily reversed.
    I would like to dwell on the first point of capital 
efficiency, because at Treasury Strategies, we are with our 
corporate treasurers day in and day out helping them manage 
their cash. U.S. corporations keep cash balances of about $2 
trillion here in the United States, which is 14 percent of U.S. 
GDP. In Europe, the comparable ratio is 21 percent, about 50 
percent higher. Should banks exit some of the capital raising 
and risk management businesses, companies will need to increase 
their cash buffers, and essentially, we will see the cash 
deficiency decline.
    Should that 14 percent rise to the European level of 21 
percent, that would mean an extra $1 trillion. Corporations 
would have to raise and, frankly, idle, sideline $1 trillion if 
capital efficiency decreases to European levels, which could 
well happen under the Volcker Rule. That $1 trillion is more 
than the entire TARP bailout. That $1 trillion is more than the 
stimulus. That $1 trillion is more than the recent Federal 
Reserve's quantitative easing. And to take that money out of 
the system and sideline it would have huge economic impacts. 
That can only be done through downsizing or deferring growth 
and expansion plans, postponing maintenance and capital 
investment, not a good outcome. We encourage you to think very 
carefully about how all of this plays out.
    There are four major regulations designed to impact 
national institutions that will impact the way corporate 
treasurers manage their cash day in and day out: the Volcker 
Rule; potential money market fund regulations; derivatives 
regulations; and Basel 3 capital requirements. All of these are 
untested, yet are going to hit the markets simultaneously.
    Ladies and gentlemen, this has not been thought through. We 
would encourage you to take the time necessary to think this 
through.
    Finally, the ultimate question is, when a U.S. corporate 
treasurer calls his or her bank in order to raise capital or 
manage risk, will there be anybody there to answer the phone?
    Thank you very much.
    [The prepared statement of Mr. Carfang can be found on page 
83 of the appendix.]
    Chairwoman Capito. Thank you.
    Mr. Carfang. I am happy to answer any questions.
    Chairwoman Capito. Thank you.
    I now recognize Ms. Hayworth for an introduction.
    Dr. Hayworth. I have the pleasure of introducing Mr. Scott 
Evans, who happens to be a constituent of mine. I am privileged 
to be his Representative in Congress in the 19th Congressional 
District of New York. He is the executive vice president and 
president of asset management of TIAA-CREF. He is the chief 
executive officer of the company's investment advisory 
subsidiaries, so he has oversight of nearly $441 billion in 
combined assets under management.
    He previously served as chief investment officer and, prior 
to that, he was head of CREF Investments. His BA is from Tufts 
University, his MM from Northwestern University's Kellogg 
School of Management, and he is a chartered financial analyst 
and a member of the New York Society of Security Analysts.
    I am privileged to welcome you, Mr. Evans, and I thank you 
for your testimony.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Capito. Thank you.
    Mr. Evans?

 STATEMENT OF SCOTT EVANS, EXECUTIVE VICE PRESIDENT, PRESIDENT 
                 OF ASSET MANAGEMENT, TIAA-CREF

    Mr. Evans. Thank you, Congresswoman Hayworth, for that kind 
introduction.
    Chairwoman Capito, Chairman Garrett, Ranking Members 
Maloney and Waters, my name is Scott Evans. I am the executive 
vice president with TIAA-CREF and president of our Asset 
Management Division. I appreciate the opportunity to speak with 
you about some of the effects of the Volcker Rule on the 
insurance industry, specifically as it relates to our ability 
to invest in certain financial vehicles.
    Please allow me to tell you just a little bit about TIAA-
CREF. We are the Nation's largest provider of retirement 
benefits. We have a not-for-profit heritage, serving 3.7 
million Americans in the academic, research, medical, and 
cultural fields. We are an insurance company managing $464 
billion in assets, providing over $10 billion a year in 
retirement income to teachers, nurses, campus service personal, 
and others in the not-for-profit sector.
    In order to provide our participants, our clients with a 
comprehensive set of financial solutions, we also own a thrift 
institution. Many of our participants have a lifetime 
relationship with TIAA-CREF and trust us to provide for their 
long-term financial success. Our thrift further enables us to 
meet our participants' lifetime financial needs by providing 
them with a banking partner as they live to and through 
retirement.
    Now, our thrift currently compromises less than a tenth of 
a percent of our total assets. However, it still qualifies as 
an insured depository institution under the proposed rule and 
thus subjects our entire enterprise to the investment and 
sponsorship restrictions of the Volcker Rule.
    While the proposed regulations provide an exemption from 
proprietary trading restrictions for insurance companies, this 
exemption does not expressly extend to allowing insurers to 
hold an ownership interest in covered funds defined to 
encompass private equity funds. This is a concern for TIAA-CREF 
and, quite frankly, others in the insurance industry, since 
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 long-term commitments that we have to our participants.
    Our insurance portfolio primarily compromises core 
investments with stable return characteristics. Private equity 
investments allow us to diversify our portfolio while also 
seeking higher yields over extended investment horizons. This 
investment blend enables us to meet the long-term financial 
goals of our participants, providing them a steady stream of 
income in retirement built on a variety of asset classes.
    Additionally, many private equity investments provide 
essential long-term capital to important sectors of the 
economy, including infrastructure, projects to build roads, 
airports, water treatment facilities, desalination plants, and 
energy distribution facilities.
    We believe that the intent of Congress with respect to the 
Volcker Rule as stated in the Dodd-Frank Act was to 
appropriately accommodate the business of insurance. We do not 
believe the proposed rule follows this intent as it subjects 
our entire enterprise to limitations designed to regulate the 
investment activities of the thrift.
    TIAA-CREF appreciates that Congress is conducting 
responsible oversight of the regulations to implement the 
Volcker Rule, and it is our hope that final regulations will 
not result in any significant disruption for insurers or the 
individuals depending on us for their long-term financial 
security.
    Thank you again for the opportunity to testify before you 
today, and I look forward to taking your questions.
    [The prepared statement of Mr. Evans can be found on page 
97 of the appendix.]
    Mr. Schweikert [presiding]. Thank you.
    Professor Johnson?

   STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF 
        ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF MANAGEMENT

    Mr. Johnson. Thank you very much.
    I would like to make three points, if I may.
    The first is with regard to the cost of financial crisis, 
including the cost of the last crisis and the cost of any 
future crisis. I have listened to the hearing so far this 
morning, and I have heard little discussion of what we lost and 
what we could stand to lose in the future.
    You can measure it in different ways. You could talk about 
more than 8 million jobs lost. You can talk about the loss of 
growth that we will not get back. I will stress the fiscal 
cost. According to the Congressional Budget Office, the change 
in medium-term debt of the United States, the Federal 
Government debt held by the private sector is roughly 50 
percent of GDP, $8.5 trillion. That is a huge cost.
    What is the mechanism through which we encountered the 
previous financial crisis? What are the risks we face going 
forward? This is my second point. A lot of these risks come 
from the behavior of very large banks; and, despite the best 
intentions and attempts by Congress to deal with this problem 
of so-called too-big-to-fail banks, I am afraid these 
structures are still with us. There is a distorted set of 
incentives that these banks have. They get the upside when 
things go well. They get the profits, the compensation for 
executives. When things go badly, the risks, the costs get 
shoved on to, ultimately, the American taxpayer. That is the 
point of the $8.5 trillion in losses.
    And the way that you blow up a bank, the way that Lehman 
was destroyed, the way that Bear Stearns was destroyed, the way 
that Merrill Lynch incurred such large losses was precisely and 
exactly through proprietary trading, properly defined, as 
defined by the statute, as defined by Mr. Tarullo in his 
remarks this morning. It was exactly the intent of those 
institutions to buy and to hold securities, hoping to benefit 
from short-term price movements, that led them into what were 
regarded as very highly rated investments. Triple A securities 
were in fact where they suffered the most damaging losses.
    Mr. Tarullo said this morning we shouldn't always be 
fighting the last war; and, of course, he is right. And the 
advantage of the Volcker Rule, as written and as attempted now 
to be implemented, is precisely on a forward-looking basis to 
prevent the big banks from again putting their hand into the 
pocket of the American taxpayer.
    My third point is, I understand that the industry is 
concerned about this, and I have read carefully the documents 
that SIFMA has sponsored, put out through various organizations 
and individuals. And I am deeply skeptical, for the reasons 
expressed in my written testimony, of the estimates of the so-
called liquidity costs or reduction in liquidity. I think these 
are massively overstated. I think the methodology that is used, 
for example, in the Oliver Wyman report, is deeply flawed. I 
have explained that in my testimony. I am happy to take that up 
with you further.
    However, let's say there are small liquidity costs. Let's 
say we should be evaluating and thinking about potential costs, 
and you all have done that very carefully this morning. We must 
weigh those costs surely against the benefits. Surely the 
question is not, can you find this or that small nickel and 
dime cost in various parts of the economy, but what are you 
doing to the risks that this society will face another massive, 
devastating financial crisis because we have banks that are so 
big that when they threaten to fail they can bring down the 
entire economy?
    We can talk about alternative approaches. We can argue 
there should be more capital in the financial system. I argue 
this day in, and day out with regulators both here and around 
the world. But you won't get it. Basel 3 will not give you 
enough capital. There is nothing else on the table that will 
make meaningful progress in this area.
    I would close by reinforcing and reiterating the point made 
by Barney Frank in this morning's panel, which was, if 
uncertainty is an issue and you want to get past the process of 
resolving what happened before and what is the basis for the 
rules going forward, then you shouldn't have more delay. You 
need to have rules now. And the rules are available. The rules 
can be put into place. And I would urge you not to encourage 
the regulators to delay any further.
    Thank you very much.
    [The prepared statement of Professor Johnson can be found 
on page 161 of the appendix.]
    Mr. Schweikert. Thank you, Professor Johnson.
    Mr. Elliott?

    STATEMENT OF DOUGLAS J. ELLIOTT, FELLOW, THE BROOKINGS 
                          INSTITUTION

    Mr. Elliott. Thank you all for the opportunity to testify 
today on the Volcker Rule. I should note that, while I am a 
Fellow at the Brookings Institution, my testimony today is 
solely on my own behalf.
    I believe that the Volcker Rule is fundamentally flawed and 
will do considerably more harm than good for the economy. I 
base this on 2 decades on Wall Street, as well as on the years 
I have spent at think tanks since them.
    Despite being a former banker, I should note that my views 
on the Volcker Rule do not stem from opposition to the Dodd-
Frank reforms. Indeed, I am on record as a strong supporter of 
the overall approach of the legislation.
    My core problem with the Volcker Rule is that it tries to 
eliminate excessive investment risk at our major financial 
institutions but without measuring either of the two key 
attributes: the level of investment risk; and the capacity of 
the institution to bear the risk. Instead, the rule focuses on 
the intent of the investment.
    I believe that the globally agreed-upon Basel rules on bank 
capital take a more intelligent approach by explicitly 
measuring both investment risk and the adequacy of capital to 
absorb those risks. One can validly argue about the techniques 
used to do this, but it makes a lot more sense to fix any flaws 
in that approach than to act as if we have no ability to 
measure risk or capital.
    Focusing on intent instead creates multiple fundamental 
problems. For starters, the concept of proprietary investments 
is highly subjective. I surmise that the underlying rationale 
is to try to separate out activities that are integral to 
banking from those that are not. By focusing on investments 
alone, the Volcker Rule implicitly assumes that lending is 
good. In addition, some investment activities are recognized as 
integral to banking, as we have discussed this morning. Others 
are not.
    This raises several concerns for me. Most fundamentally, 
finance has evolved over the last few decades to the point 
where corporate borrowers switch easily between borrowing via 
loans and via securities. This means that securities activities 
are now integral to modern corporate banking just as lending 
has always been. Further, it is extremely hard to draw the line 
between acceptable and unacceptable activities under the 
Volcker Rule.
    Operationalizing the arbitrary and subjective distinctions 
will force regulators to peer into the hearts of bankers, which 
will be extremely difficult. We are in danger of forcing 
regulators to micromanage banks in one of their core 
activities, the ownership and trading of securities.
    In addition, the rule misses investments that are taken on 
with an acceptable intent but which still represent excessive 
risk. For example, we want banks to hold safe and highly liquid 
securities to meet sudden demands for cash without having to 
make a fire sale of their loans or other assets. Therefore, the 
proposed rules provide an exemption for liquidity activities, 
but a large portion of the investment losses at commercial 
banks in the crisis were on their holdings of securities 
purchased for liquidity purposes. They bought AAA mortgage-
backed securities, as Professor Johnson noted, which were quite 
liquid at the time of purchase; thus, the intent would have 
been considered acceptable, but banks still lost a lot of 
money.
    These critical flaws mean that the Volcker Rule will do a 
poor job of identifying or eliminating excessive investment 
risk, will be costly even when it correctly identifies risk, 
and will be even more costly when it discourages risk-taking 
that is incorrectly treated as if it were excessive. Thus, the 
rule will raise the cost of credit to our suffering economy. 
Securities markets will be harmed by a substantial reduction in 
the liquidity provided by banks. This will widen bid-ask 
spreads and make new issuances of securities more expensive.
    Meanwhile, banks themselves will have a reduced role in 
profitable lines of business that are integral to modern 
banking, forcing them to recoup the lost revenues through other 
ways of charging more to their customers. As a result of all 
this, businesses will pay more for funds to invest in new 
plants or R&D or to hire additional workers.
    The decreased efficiency of markets will also spur 
investors to demand higher risk premiums, reducing the price of 
existing stocks, bonds, and other assets, potentially including 
housing. U.S. banks will also lose market share to global 
competitors. This will further reduce their profits, leading to 
the pass-through to customers of more costs and destroying some 
high-paid U.S. jobs.
    Ideally I would like to see Congress repeal the Volcker 
Rule. Failing that, Congress should send a clear signal that 
regulators are to implement the rule in a modest and relatively 
simple fashion that focuses on only stopping those activities 
that very clearly violate the rule.
    Thank you again for the opportunity to testify. I look 
forward to your questions.
    [The prepared statement of Mr. Elliott can be found on page 
94 of the appendix.]
    Mr. Schweikert. Thank you, Mr. Elliott.
    Our next speaker is Alexander Marx, head of global bond 
trading, Fidelity Investments.

   STATEMENT OF ALEXANDER MARX, HEAD OF GLOBAL BOND TRADING, 
                      FIDELITY INVESTMENTS

    Mr. Marx. Thank you. Chairmen Capito and Garrett, Ranking 
Members Maloney and Waters, and members of the subcommittees, 
thank you for your opportunity to testify today. My name is 
Alex Marx, and I am the head of global bond trading for 
Fidelity Investments. In this role, I am responsible for the 
bond trading that supports the investment products for which 
Fidelity serves as investment adviser, including Fidelity's 
mutual funds.
    Fidelity is one of the world's leading providers of 
financial services, with assets under administration of $3.4 
trillion, including managed assets of more than $1.5 trillion. 
Fidelity provides investment management, retirement planning, 
portfolio guidance, brokerage, benefits outsourcing, and other 
financial products and services to more than 20 million 
individuals and institutions, as well as through 5,000 
financial intermediary firms. We manage over 400 mutual funds 
across a wide range of disciplines, including equity, 
investment-grade bonds, high-income bonds, asset allocation, 
and money market funds. The assets we manage belong not to 
Fidelity but, rather, to the funds and the shareholders and 
customers who have entrusted us with their savings.
    In this role, Fidelity has a fiduciary duty to serve in the 
best interests of these clients, who are mostly small 
investors, such as retirees, parents saving for college, and 
other individual investors, as well as pension plan 
participants and institutional investors such as governments, 
universities, nonprofits, and other businesses.
    It is in this fiduciary capacity that I appear before you 
today to make you aware that the implementation of the Volcker 
Rule, as proposed, would have significant negative impacts on 
Fidelity's customers. Fidelity is not here to represent the 
interests of Wall Street, but is a buy-side capital markets 
participant who is interested in ensuring the U.S. capital 
markets remain the most liquid and efficient in the world.
    We have two primary concerns with the regulations that have 
been proposed to implement the Volcker Rule. First, the rules 
as proposed will have significant burdens on banks when they 
engage in principal trading. The result of this is that the 
funds will need more cash available to accommodate shareholder 
redemptions, causing a loss of investment opportunities and 
higher transaction costs, which in turn will lead to reduced 
return investors across the fund industry.
    Second, the proposed rule could slow growth in the economy 
by raising the cost of capital issuance for U.S. companies and 
municipalities, which would come at a particularly unfortunate 
time as the economy continues to strive for recovery. As an 
investment adviser, Fidelity is not a bank that would be 
directly regulated by the proposed rules. Indeed, we recognize 
that the Volcker Rule, as passed by Congress, regulates banks 
and seeks to reduce the likelihood that proprietary trading 
conducted by those banks could put the U.S. economy at risk. 
The banks provide liquidity in the capital markets through 
their ability to commit capital to trade securities with our 
funds at any point in time.
    This customer-facing principal trading with the dealer as 
the principal on one side of the trade and Fidelity's funds as 
the principal on the other is significantly different from the 
speculative proprietary trading that the Volcker Rule sought to 
limit, yet this distinction is not adequately addressed in the 
proposed rules. We are concerned that the proposed market-
making exemption will be so burdensome for the dealers that 
they will either have to charge market participants more for 
trades or, in some cases, dealers will choose to exit market 
making in certain businesses altogether, resulting in less 
liquidity, increased volatility, and higher transaction costs 
for investors.
    Additionally, banks regulated by the Volcker Rule serve 
critical roles as underwriters in the capital markets. As 
underwriters, the banks purchase securities from corporate and 
municipal issuers and sell these securities to investors such 
as Fidelity's funds. The proposed rules will likely affect the 
manner in which banks conduct underwriting services, 
potentially resulting in higher costs of capital issuance for 
borrowers. Higher borrowing costs for small- to mid-cap issuers 
could potentially cause downstream effects on the health of 
U.S. businesses and their ability to hire workers and invest in 
new markets. The resulting higher capital costs and less 
efficient markets may also compromise the competitiveness of 
U.S. businesses globally.
    Lastly, due to the narrow definition of municipal 
securities in the proposal, there will be higher debt costs for 
many municipal issuers, impairing their ability to fund 
critical projects.
    The impact of the Volcker Rule proposal would have 
significant impact on equity markets as well as fixed-income 
markets. For example, the proposal would jeopardize the 
abilities of dealers to engage in block or program risk trading 
with large institutional investors like Fidelity's funds. My 
written statement includes additional details on the effect on 
equity markets.
    In conclusion, we look forward to working with Congress and 
the regulators to ensure that any final rulemaking is 
appropriately tailored and will not create negative, unintended 
consequences for investors, capital formation, and economic 
growth. I would like to thank the subcommittees and their 
staffs for their work on issues important to investors in the 
financial markets and for holding this hearing to consider the 
implications of the proposed regulations related to the Volcker 
Rule, and I would be happy to answer any questions.
    [The prepared statement of Mr. Marx can be found on page 
165 of the appendix.]
    Mr. Schweikert. Thank you, Mr. Marx.
    Our next witness is Wallace Turbeville, on behalf of 
Americans for Financial Reform.

STATEMENT OF WALLACE C. TURBEVILLE, ON BEHALF OF AMERICANS FOR 
                        FINANCIAL REFORM

    Mr. Turbeville. Thank you. Today, I speak on behalf of 
Americans for Financial Reform, a coalition of more than 250 
organizations who have come together to advocate for reform of 
the financial sector. I am reminded today of a time 33 years 
ago when as a young attorney I was commissioned to write 
testimony for a partner of Goldman Sachs to be delivered to a 
committee of Congress on behalf of the Securities Industry 
Association. That is the predecessor organization of SIFMA that 
represented investment banks. The goal of the testimony was to 
resist repeal of Glass-Steagall, so to protect investment banks 
from competing with commercial banks and the cheap and 
plentiful capital that they would have. Those issues are really 
sort of still central to what we are talking about today.
    Now, there has been discussion of the Volcker Rule as based 
on intent or based on looking into the hearts of people or 
using psychiatrists and what not. In reality, in looking at the 
rules, the Volcker Rule is all about prohibiting a line of 
business which has a purpose, so you have to define what the 
purpose is of the business. That is a direct threat in terms of 
a run on the financial system.
    In other words, proprietary trading large positions where 
margin calls are required, regardless of what the crisis is, 
regardless of what the causes are, the vehicle that is most 
threatening to the financial system has historically in this 
country been a run on it, and that is what it does. Proprietary 
trading is not made illegal. Trading demand can, and, under the 
rule, will be met by other institutions in the system.
    The Act surgically excises only those trading practices 
which cause the greatest risks and tries to leave as 
permissible client-oriented trading. However, what has happened 
over the years is client-oriented trading, the fever of 
proprietary trading has sort of infiltrated client-oriented 
trading, so it is hard to tease out what is client-oriented and 
what is not. That is why the rules are so long and complex.
    Ninety percent of the 300 pages is about discussion, and of 
those 300, that 90 percent, most of it is about trying to tease 
out what is client-oriented and what is not. Having prevailed 
with the insertion of numerous exceptions and permissions in 
the Volcker Rule, it is ironic that banks now complain that the 
rules are complex. That was somewhat inevitable.
    The industry sets forth a number of objections, but the 
centerpiece is that liquidity in the traded markets will dry 
up, imposing large costs on society, and studies are put forth 
to support that, but these studies don't withstand scrutiny.
    For example, an explicit assumption of the Oliver Wyman 
study that SIFMA commissioned is that reduced bank activity 
will not be replaced. That assumption is transparently false. 
Proprietary trading that is profitable and useful and makes 
sense will migrate out of banks and into other organizations, 
and the capital behind that will follow it. It is really 
remarkable that all of the industry comments assume that this 
will not be replaced. They pound the drums about the business 
moving off to Dusseldorf, but they ignore the possibility, when 
they do their numbers and come up with their costs, that the 
business might actually just move across the street.
    The claim about the cost of lost liquidity is a complex 
one. In fact, a lot of the trading that is going to be 
prohibited isn't actually about liquidity, it is about--it is 
trading of other types.
    There is an interesting study done by Professor Thomas 
Philippon of NYU Stern School that found that the overall 
financing costs in the entire real economy have actually 
increased over time, despite greater IT efficiencies. In his 
words, the finance industry that sustained the expansion of 
railroads, steel, and chemical industries, and the electricity 
and automobile revolutions was more efficient than the current 
financing industry.
    This reduction of liquidity asserted by the commenters is 
based on all these misleading assumptions using market data 
from stress situations and the rest; but worse, the commenters 
ignore the costs and risks arising from subsidized, too-big-to-
fail trading. And finally, in all of the cost benefits, the 
value to the public of avoiding bailouts is not even 
considered.
    Thank you for the opportunity to speak, and I am happy to 
answer questions.
    [The prepared statement of Mr. Turbeville can be found on 
page 220 of the appendix.]
    Mr. Schweikert. Thank you.
    Our next witness is Douglas Peebles, chief investment 
officer and head of fixed-income, AllianceBernstein, on behalf 
of the Securities Industry and Financial Markets Association 
Management Corp.

 STATEMENT OF DOUGLAS J. PEEBLES, CHIEF INVESTMENT OFFICER AND 
   HEAD OF FIXED INCOME, ALLIANCEBERNSTEIN, ON BEHALF OF THE 
 SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION'S ASSET 
                        MANAGEMENT GROUP

    Mr. Peebles. Good afternoon, Chairmen Garrett and Capito, 
Ranking Members Waters and Maloney, and members of the 
subcommittees. My name is Douglas Peebles. I am the chief 
investment officer and head of fixed-income at 
AllianceBernstein, a global asset management firm with 
approximately $400 billion in assets under management. 
AllianceBernstein is a major mutual fund and institutional 
money manager, and our clients include, among others, State and 
local pension funds, universities, 401(k) plans, and similar 
types of retirement funds and private funds.
    Today, I will focus on provisions of particular concern to 
AllianceBernstein and SIFMA's Asset Management Group. We 
believe significant changes must be made to the implementing 
regulations, particularly with respect to the market-making 
exemption. Market making is a core function of banking entities 
and provides liquidity needed by all market participants, 
including pension funds and individual investors. The simplest 
market-making activity involves exchange-traded equity 
securities, where in most cases, market makers are generally 
able to resell securities quickly.
    Other markets, however, are more complex and less liquid. 
In the fixed-income market, for example, a single issuer may 
have many debt instruments outstanding with different terms, 
and as a result, there is fragmentation and intermittent 
liquidity for any single debt issue. Because in fixed-income, 
market buyers and sellers are much less likely to wish to trade 
at the same moments in time, market makers bridge the gap and 
provide the immediate liquidity necessary for these markets to 
function. In carrying out this function, market makers are 
required to evaluate all the risks in purchasing the securities 
and transact with investors at a price that reflects those 
risks.
    The Dodd-Frank Act expressly seeks to protect these 
functions by providing an exemption for the purchase, sale, 
acquisition, or disposition of securities and other instruments 
in connection with underwriting or market-making related 
activities.
    Unfortunately, there are several problems with the proposed 
regulations. One significant issue is that they were drafted 
from the perspective of regulated market-making activities for 
equity securities traded on organized markets such as exchanges 
where intermediaries generally act as agents. The proposal 
clearly fails to account for different types of market-making 
environments, particularly those related to fixed-income and 
other over-the-counter markets.
    We believe the failure to take into account different OTC 
market-making activities reflects a major oversight in the 
proposal and could have devastating effects on fixed-income 
markets that exhibit intermittent liquidity.
    The potential impact on liquidity would have negative 
consequences for mutual fund investors. Products that feature 
less liquid investments, like many fixed-income funds, could 
experience difficulties with subscription and redemption 
activity. If banking entities reduce their role to agents, and 
there is no other counterparty available, then mutual funds 
might face challenges in redeeming shares at the stated net 
asset value. The result could be either few NAV-style products 
in the market or a limited universe of securities for them to 
invest in, which would harm capital availability.
    Such a change could have consequences to the average retail 
consumer. For those who are living on a fixed-income, such as 
seniors, if these assets are illiquid or have significant 
decrease in value, it could have a negative impact on our aging 
population's ability to take care of themselves. It is also 
important to note the negative impact it will have on those 
individuals who are doing the right thing by saving for their 
future retirements.
    Rather than establishing applicable standards to 
government-permitted market-making activities, however, the 
proposal creates a presumption that any covered financial 
position held for a period of 60 days or less is a prohibited 
proprietary transaction, essentially prohibiting market makers 
from holding inventory. The proposal allows for rebuttal of the 
60-day presumption if the banking entity can demonstrate the 
position was not acquired for any of a several list of 
purposes.
    We believe this combination of a negative presumption with 
a list of restrictive conditions will encourage market makers 
to dispose of every position as quickly as possible to avoid 
the possibility that the transaction will be considered a 
prohibited, proprietary trade.
    It is imperative that the implementing regulations take 
into account the fact that market making often involves a need 
to take short-term positions that will result in profit and 
loss. This activity is the natural economic result of a market 
maker's willingness to commit capital to facilitate orderly 
trading. This proposal fails to recognize that there are not 
perfect hedges for all securities. It is impossible to predict 
what the behavior of even the most highly correlated hedge will 
be versus the underlying asset being hedged. In general, the 
realization of some profit and loss is unavoidable, even when a 
market maker commits capital to facilitate orderly trading of 
liquid securities with properly structured hedges.
    The impact of the regulations will have broad implications. 
The ability of the corporate issuers to raise capital in the 
United States by selling their debt securities is dependent on 
the availability of secondary market liquidity, which is 
largely provided by banking entities through their market-
making activities. We are convinced that the proposal will 
significantly reduce the liquidity of the secondary market for 
debt securities and is likely to have a profound and unintended 
adverse effect on our capital markets.
    [The prepared statement of Mr. Peebles can be found on page 
180 of the appendix.]
    Mr. Schweikert. Thank you, Mr. Peebles.
    Our next witness is Mark Standish, president and CEO, RBC 
Capital Markets, on behalf of the Institute for International 
Bankers.

 STATEMENT OF MARK STANDISH, PRESIDENT AND CO-CEO, RBC CAPITAL 
 MARKETS, ON BEHALF OF THE INSTITUTE OF INTERNATIONAL BANKERS 
                             (IIB)

    Mr. Standish. Thank you, Chairmen Capito and Garrett, 
Ranking Members Maloney and Waters, and members of the 
subcommittees. My name is Mark Standish, and I am president and 
co-CEO of RBC Capital Markets, the corporate and investment 
banking platform for the Royal Bank of Canada. Now, as someone 
who is British by birth and American by choice, it is an honor 
to testify before you on behalf of the Institute of 
International Bankers.
    The IIB's members consist principally of foreign banks that 
have substantial banking, securities, and other financial 
operations in the United States. Our members contribute 
significantly to the depth and liquidity of U.S. financial 
markets and to the overall U.S. economy. IIB members' U.S. 
operations have approximately $5 trillion in assets, generate a 
quarter of the commercial and industrial bank loans made in 
this country, employ tens of thousands of Americans, and 
directly contribute to the U.S. economy more than $50 billion 
in annual expenditures. Our U.S. operations are subject to U.S. 
regulation and supervision, our activities outside the United 
States are subject to regulation by authorities in the 
countries in which we operate, and our home country regulators 
supervise our global activities.
    Like U.S. banks, we have concerns regarding how the 
proposal impacts our U.S. operations. However, today my remarks 
will focus on the cross-border implications of the proposed 
regulations.
    The IIB supports the goal of financial reform. We 
acknowledge the agencies' hard work and the challenges in 
developing regulation to implement the Volcker Rule. However, 
we submit, the proposal as currently formed is inconsistent 
with Congress' intent and will not advance reform goals. 
Congress was clear that foreign banks trading or funds 
activities conducted outside of the United States are not 
subject to the rule, recognizing that these activities are 
regulated under foreign law by home country supervisors. The 
proposed regulations, however, fail to adhere to this long-
standing U.S. policy.
    For example, the proposal would restrict a foreign bank's 
trading desk in London, Toronto, or Tokyo from buying or 
selling for its own account any securities traded on a U.S. 
trading platform, including the New York Stock Exchange, or 
under the proposal, our employees in Houston would not be able 
to market a non-U.S. fund to clients in South America. A 
Canadian bank could not sell interests in Canadian mutual funds 
to the 1.2 million Canadian snowbirds who regularly visit the 
United States. Foreign banks would be restricted from 
transacting in liquid securities of home-market issuers 
necessary to fulfill our roles in supporting our domestic 
trading markets. And finally, the proposal would frustrate our 
ability at the parent-bank level to actively and dynamically 
manage our balance sheets in currencies outside of our home 
countries.
    In short, the extraterritorial reach of the proposed 
regulations restricts activities that would pose no threat to 
the United States but, rather, directly and indirectly support 
U.S. jobs and the U.S. economy.
    The proposal exempts trading in U.S. Government securities 
but fails to allow principal trading in non-U.S. Government 
securities. Regulators in Canada and Japan have written to the 
agencies explaining that such an uneven playing field could 
undermine the liquidity of government debt markets outside of 
the United States as well as impede the ability of foreign 
banks to manage their liquidity and funding needs. IIB strongly 
urges the agencies to adopt an exemption for trading foreign 
government securities.
    Lastly, I would be remiss not to comment on the extremely 
complex compliance requirements. They impose extensive 
quantitative reporting requirements on banks that engage in 
permitted activities, such as market making and risk-mitigating 
hedging. Apart from the questionable usefulness of the 
approach, such requirements should not apply to the non-U.S. 
operations of foreign banks without regard as to whether the 
U.S. taxpayer is put at risk.
    In conclusion, we are very concerned that the burdens of 
the proposed regulation will far outweigh the alleged benefits. 
It will encroach on the autonomy of foreign banks and 
regulators, and it will harm the competitiveness of U.S. 
markets, and the global markets that U.S. counterparts transact 
in.
    We urge the agencies to take their time in developing 
regulations to implement the rule to make sure they get it 
right, and we would submit that the Basel 3 requirements very 
well may achieve the objectives sought to be addressed by the 
Volcker Rule. Thank you and I look forward to your questions.
    [The prepared statement of Mr. Standish can be found on 
page 198 of the appendix.]
    Mr. Schweikert. Thank you, Mr. Standish.
    I recognize Mrs. Biggert for 5 minutes for questions.
    Mrs. Biggert. Thank you, Mr. Chairman, and my questions are 
for Mr. Evans to start out with, and I am glad you are here. I 
did not have the opportunity to ask the regulators about the 
insurance issue, but I am going to submit several questions 
that I had for them also, so I think that your testimony has 
been very helpful.
    You stated in your testimony that the Dodd-Frank Act 
provides an exemption from the Volcker Rule for insurance 
companies, but there seems to be part exemption and a question 
about private equity. If you could give some examples of the 
private equity investments that are attractive to insurers that 
invest for long term, and could you explain how that will--do 
those investments differ from private equity firms like Carlyle 
or Bain, but is there a clarification in the Volcker Rule that 
these are acceptable as exemptions or not?
    Mr. Evans. Thank you, Congresswoman, for the question. The 
Dodd-Frank Act says that the regulators should appropriately 
accommodate the business of insurance, and the accommodations 
could take the form of giving an exemption for proprietary 
trading or giving an exemption for covered funds, private 
equity funds, hedge funds, etc.
    The interpretation of the rulemaking seems to be that it 
exempts only proprietary trading, which makes no sense when you 
think about it, because proprietary trading is a short-term 
activity. Insurance companies invest for the long term to 
provide, in our case, lifetime income for 3.7 million people in 
the academic, medical, and cultural fields, and so for us, it 
is extraordinarily important that we maintain an ability to 
make these type of investments.
    Now, we do all kinds of investing that would be considered 
covered-fund investing, but to give you some examples of long-
term investing that helps us allow our 3.7 million participants 
to have large and stable lifetime income, we are invested in a 
power plant in the Northeast, a toll road in the Southeast, an 
electricity transmission business in the Southwest, and a clean 
coal gasification plant in the Midwest. These are long-lived 
investments, 20, 30, 40 years in duration. They are designed to 
provide steady streams of income that can support average 
working people's lifetime income after their working years.
    Mrs. Biggert. Okay. Then, obviously, we have been working 
on making sure that insurance companies, which are regulated by 
States--and so this bothers me that they are really bringing 
this into the Volcker Rule on this. How do State insurance 
investment laws add a layer of protection from equities 
speculation by insurance companies affiliated with banks?
    Mr. Evans. State regulators have regulated insurance 
companies like TIAA-CREF for many, many years, and they have a 
number of restrictions. It is no accident that insurance 
companies are structured in a conservative manner and made it 
through the recent downturn in relatively good shape, because 
we are under strict regulations. In our case, the State of New 
York is the primary State regulator. We have restrictions on 
the type and amount of covered-fund type investing that we do. 
There are very strict regulations on that. Those regulations 
work well, and we are working with the new Federal insurance 
overseer to make sure there is consistency and not duplication 
of regulations as we transfer to Federal regulation.
    Mrs. Biggert. Do you think that Congress intended to allow 
insurance companies just to be able to engage in proprietary 
trading and also to invest in the private equity and hedge 
funds?
    Mr. Evans. It is our belief that Congress intended, when it 
said that the rulemakers should appropriately accommodate the 
business of insurance, that they were speaking of both 
proprietary trading and covered funds, particularly since 
insurance companies don't engage in proprietary trading, so in 
our minds, they must have meant covered funds. And we think it 
is very important that the rules, as they become finalized, 
specifically exempt covered funds' activities for the reasons 
that I mentioned.
    Mrs. Biggert. Thank you very much.
    Mr. Evans. Thank you.
    Mrs. Biggert. Mr. Carfang, do you think that the Volcker 
Rule has the potential to raise the cost of capital for both 
large nonfinancial companies and small to mid-sized American 
businesses?
    Mr. Carfang. Thank you for the question, Congresswoman. 
Absolutely. Because of the Volcker Rule's eliminating or 
restricting the activities of market participants, the costs 
will go up. There are fewer bidders to bid down the price. But 
I think an even greater concern is the crowding out of small 
businesses. As we continue to have concentration in the larger 
banks--and the Volcker Rule exacerbates that--the largest 
companies will still have access to--the largest and highest 
credit rated companies will still have access to capital, 
albeit at a higher cost. There is a real question of whether 
there is enough capital to avoid the crowding out of smaller 
businesses at any cost.
    Mrs. Biggert. We have been working to try and increase jobs 
and take down the barriers for small businesses to be able to 
do that. The only jobs that the Dodd-Frank bill seems to have 
increased is compliance jobs, and so is this one of the costs 
that would be increased?
    Mr. Carfang. Exactly. Costs will go up in terms of, first 
of all--
    Mr. Schweikert. And I hope you will forgive me, Mrs. 
Biggert--
    Mr. Carfang. --the cost of the services, the rates, the 
operating services across-the-board.
    Mrs. Biggert. Thank you. I yield back.
    Mr. Schweikert. Thank you, Chairwoman Biggert.
    Ranking Member Maloney has asked us to make sure we work 
through Members on her side who did not get a chance to ask a 
question before. Mr. Ellison, I think you are next.
    Mr. Ellison. Thank you, Mr. Chairman, and also thank you, 
Congresswoman Maloney. And also, thank you to the panel. I 
appreciate all of the help that you have given us to understand 
these issues, but I just want to ask kind of a basic question 
first.
    Do you all agree with the basic premise that trading 
operations of banks shouldn't be subsidized with deposit 
insurance access to the discount window and other Federal 
subsidies? Do you agree with that basic idea? How about you, 
Mr. Carfang?
    Mr. Carfang. I generally agree with that statement. 
However, like everything else in this bill, it is subject to--
    Mr. Ellison. Thanks a lot. I only have limited time. Does 
everybody basically agree with that or is there anybody who 
disagrees? Professor Johnson?
    Mr. Johnson. If I understood the question correctly, you 
are asking whether we agree with the subsidies, with the 
existing structure of subsidies?
    Mr. Ellison. No, no. What I am asking is, do you basically 
agree with the goal and intent of the Volcker Rule? Do you 
agree with the premise that trading operations of banks should 
not be subsidized?
    Mr. Johnson. Absolutely, Congressman.
    Mr. Ellison. Oh, I know you agree. I know you agree, and I 
know Mr. Turbeville agrees, but I am kind of curious--
    Mr. Elliott. It is a more complex question than it might 
appear on the surface.
    Mr. Ellison. I hear you, Mr. Elliott, and I want to ask you 
about that. So if you agree on the basic idea that banks should 
not be subsidized by deposit insurance or, basically, the 
taxpayer, if they want to engage in investment which could lose 
or gain money--
    Mr. Elliott. I don't believe they should be subsidized in 
any of their activities based on things like deposit insurance. 
However, if you subsidize them at all, the money is fungible. 
You end up effectively subsidizing any of the things that they 
choose to do. That is why I view it as a more--
    Mr. Ellison. Okay, now, thank you for asking that because 
before I came to Congress, I was a public defender. This stuff 
is complicated. But I am aware that between the establishment 
of Glass-Steagall and Gramm-Leach-Bliley, for a long time banks 
couldn't--the core functions of banks and insurance companies 
and investment banks were separated, and they couldn't do this 
kind of stuff, and the system seemed to be pretty stable. And 
now that they can do it, things seem kind of unstable, and what 
everybody except for Mr. Johnson and Mr. Turbeville seem to be 
saying is that we absolutely have to allow banks trading 
operations to use subsidized deposit insurance and discount 
window access and the monies and the accounts associated. We 
have to do that because if we don't, we won't have access to 
capital, overseas investors will outcompete us, we will lose 
jobs. That seems to be the--tell me why the system was stable 
for so long when we couldn't do this and how it is so essential 
that we have to do it now. Mr. Turbeville, maybe you can--
    Mr. Turbeville. I actually remember the old system.
    Mr. Ellison. Okay. Me, too.
    Mr. Turbeville. I think you have hit on the real issue, 
which is not that this business is going to, poof, go away, but 
we are really talking about moving the business from being 
capitalized by subsidized capital to being subsidized by free 
market properly priced capital. I think it is absolutely 
correct, and I think that what one of the things that was part 
of the genius of the New Deal was they figured out, yes, you 
put in the safety net for the banks, but you also separate out 
this trading activity so that one doesn't overlap the other. I 
think Mr. Elliott is absolutely right, even though deposit 
insurance, for instance, doesn't directly subsidize the 
capital, it indirectly does because you can't let those 
institutions go.
    Mr. Ellison. It seems to me, in the absence of something 
like the Volcker Rule, we have a ``heads-I-win, tails-you-
lose'' system in which, if I am a bank, I can go out and buy 
mortgage-backed securities, AAA rated, and if they make a bunch 
of money, I keep that. I don't give that to depositors whose 
money I use. But if I lose a bunch of money, then I am coming 
to the taxpayer to save me, and it just seems so unfair.
    And as we go through this debate, a lot of you guys who are 
so smart, you know so much, and I am so impressed, but it seems 
like what you are doing is saying, ``There are 10 exceptions, 
no, 20, no 30, no 50. You know what, it is too complicated, 
let's just keep it how it was since 1999.'' And it just doesn't 
seem right. It seems like if we can't fix and have everything 
perfect that we can't do anything, which of course is a good 
deal because if I said, ``Look, I am going to use somebody 
else's money, invest it, maybe put it in mortgage-backed 
securities, if I make a bunch of money, I keep that; if I lose 
a bunch of money, somebody else pays.'' And of course, why 
would anybody want to stop that, if they are on the plus side 
of it?
    And I guess what everybody except for Mr. Johnson and Mr. 
Turbeville is saying is, right, we don't want to stop it, we 
like it. So tell me why I am wrong.
    Mr. Elliott. If I could just briefly say, as I mentioned in 
my testimony, I have been a strong supporter of Dodd-Frank, 
which contains many things that are far from perfect but move 
us in a safer direction. So I want to be clear about that.
    Mr. Ellison. Okay.
    Mr. Elliott. The thing is, the premise of your question and 
the explicit comments of Professor Johnson are that the Volcker 
Rule would actually increase safety in some appreciable way. 
That I do not actually believe. For instance, holding the 
mortgage-backed securities. The holding of mortgage-backed 
securities, most of them would have been perfectly okay under 
the Volcker Rule. You can lose money on these investments 
without being in danger from the Volcker Rule.
    Mr. Ellison. Does anybody--well, let me--
    Mr. Johnson. Congressman, you are exactly right. The 
Volcker Rule proposes to remove the subsidies from some very 
powerful people in our society. Not surprisingly, they would 
like to keep those subsidies, and they are telling you that 
today.
    And with regard to access to capital and the cost of 
capital, this is not just unfair, Congressman, this is 
incredibly inefficient. What has destroyed access to capital, 
what has destroyed access to jobs in this country over the past 
4 years, was the behavior of the biggest firms in the financial 
sector, the way they used those subsidies in a reckless and 
excessive manner, and they will do it again.
    Mr. Schweikert. Mr. Ellison?
    Mr. Ellison. I am out of time?
    Mr. Schweikert. Yes. It was getting interesting, but we are 
out of time.
    Mr. Ellison. Sorry about that.
    Mr. Schweikert. Thank you, Mr. Ellison.
    Without objection, the following statements will be made a 
part of the record: the American Bankers Association; 
BlackRock, Inc.; the Bond Dealers of America; the Business 
Roundtable; CMS Energy; ICI Global; SIFMA; Silicon Valley Bank; 
and Stanford Professor Darrell Duffie's comment letter.
    Mr. Schweikert. I am going to yield myself 5 minutes and 
see if I can actually do a little continuing on parts of this 
discussion.
    Professor, I actually heard a couple members of the panel, 
at least one but maybe two, touch on Basel 3 and Basel 2.5 that 
are already out there. Basel 3 is also creating a capital 
safety net. Can you comment on that?
    Mr. Johnson. Yes, Congressman. Basel 3 is very unlikely to 
provide enough capital for the financial system. Remember, this 
is a least common denominator negotiation across leading 
countries, industrialized countries. It includes the Europeans, 
and as I am sure you are fully aware--
    Mr. Schweikert. Are you picking on the Europeans?
    Mr. Johnson. They brought it on themselves.
    Mr. Schweikert. I should share, I think, that in Germany, 
the first stage of downgrade may have happened today.
    Mr. Johnson. I missed that.
    Mr. Schweikert. Germany.
    Mr. Johnson. What about Germany today?
    Mr. Schweikert. Downgrade.
    Mr. Johnson. I am sorry, I didn't hear that, I didn't hear 
the point.
    The Europeans don't want capital in their banks, so 
Deutsche Bank, for example, is a very lightly capitalized bank. 
They have consistently resisted, from all accounts within the 
Basel Committee, attempts to raise capital standards, even to 
the levels proposed by the Federal Reserve, even to the levels 
that Mr. Tarullo was recommending. So the idea that Basel 3--
from an American perspective, does Basel 3 do enough to make 
our system safer? Absolutely not. Capital requirements should 
be increased way beyond what you will get in that framework.
    Mr. Schweikert. Okay. To that point, Mr. Standish, you 
actually touched on Basel 3. Help me understand where the 
professor is right, or half right, or wrong.
    Mr. Standish. Thank you, Congressman. We have actually 
adopted in Canada large parts of Basel 3, and by the 1st of 
January 2013, we will have also adopted Basel 3 in our trading 
books. The effect of that from pre-crisis levels has probably 
been to increase the amount of capital supporting our trading 
activities by 2 to 3 times.
    In order for Members to understand Basel a little better, 
on the key characteristics of Basel 3, banks will need to hold 
substantially more capital than is required today, and again I 
just mention that additional capital is heavily in linked to 
trading books.
    Bank capital will be comprised predominantly of common 
equity, and that is versus Tier 2/Tier 3 types of paper 
capital. Banks will need to hold substantially more 
unencumbered liquid assets to enhance their liquidity positions 
and reduce dependency on short-term financing, and that also 
includes increased term funding of their businesses. Banks will 
be required to establish loan loss reserves that consider full 
economic cycles, and here we are talking about countercyclical 
capital. When things are great, everyone thinks it is going to 
continue, so you don't think you need to hold much capital 
against those exposures. That will be reversed. Banks will be 
subject to global leverage ratios that will govern balance 
sheet leverage, and that includes bringing onto balance sheets 
the impact of off-balance sheet vehicles that were the cause of 
a lot of the problems with the shadow banking system.
    So I feel that Basel 3 actually does a tremendous job and 
actually does, I think, a better job than Volcker of addressing 
the shortfalls in the financial system. Obviously, Basel 3 is 
then applied globally differently by jurisdiction, depending on 
the risks in individual jurisdictions.
    Mr. Schweikert. And Professor, maybe you could quickly 
respond, because there are a couple other areas I want to touch 
on?
    Mr. Johnson. Just to counter on the point of whether there 
is enough capital, Deutsche Bank, which is, as far as I am 
aware, almost Basel 3-compliant at this point, has total assets 
of around 1.9 trillion euros, it has bank capital compliant 
with Basel 3 of about 60 billion euros. It faces potential 
losses on, of course, its sovereign lending and exposure to 
other banks within the European context. This is a very thinly 
capitalized major bank around which the Germans and the 
Europeans are negotiating.
    They also own Talus Corporation in the United States, that 
is more than 50-to-1 leveraged according to the official 
Federal Reserve statistics, and that is okay also, apparently, 
under the way we operate.
    Mr. Schweikert. Only because I am down to a minute left, 
but I would love to have a side conversation with you on this. 
I actually have some real interest in the ECB issues.
    Mr. Evans, your book of business is somewhat unique with 
what you do and the population you serve. How would we exempt 
you? How would the hedging practices, particularly the number 
of folks who--and I must admit, I think actually I even have 
some resources with you also, the annuities and the other 
products. Tell me what the Volcker Rule does to you and 
mechanically how you see yourself either needing to be exempt, 
or the costs we just pushed on to your members.
    Mr. Evans. Thank you, Congressman. I think it is actually 
pretty straightforward. If the rulemakers adjust their 
interpretation of your intent to include, your intent to 
appropriately accommodate the business of insurance to include 
an exemption for covered-funds activity, I think that does the 
trick, because that will enable us to make these investments in 
what are loosely defined as private equity securities, but what 
we recognize as very long-term investments in infrastructure 
and other assets. So, I think it is actually pretty 
straightforward in terms of what needs to be done to correct 
this.
    Mr. Schweikert. You win the award for the simplest answer 
of the day. My time has expired.
    I now recognize Mr. Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman, and to the panel, 
excellent testimony. I think all of you make legitimate points. 
I draw some different conclusions than some of you do.
    And Mr. Carfang, you really had a cogent--you laid it out 
nicely to begin with, and then you sort of countered by the 
professor, and sitting here as kind of the political guy, the 
decision-maker, we want to have robust, efficient markets, yet 
we don't want to stick the taxpayer with a ton of 
responsibility if those efficient markets somehow fail. And so, 
the more efficient they are going up, the more efficient they 
are going down. And in America, we try to sort of limit that a 
little bit, and that started with the New Deal, with the Glass-
Steagall separating investment banking from commercial banking, 
and over time, that eroded; unitary banking went, the 
investment banking piece went, we still have the FDIC, which I 
think is the third piece of Glass-Steagall that is left.
    So when this all came to us, we started out, and Mr. Miller 
and I had a one-page amendment that was more or less not the 
Volcker Rule but sort of the precursor to the Volcker Rule that 
said--I first said if you are a systemically significant 
organization, it could have been an insurance company, it could 
have been a bank, whatever, and your trading places the economy 
at risk, then you can be ordered to divest it. So, there was a 
danger piece to it.
    Mr. Miller said, we ought to have that for banks generally. 
So we added banks, but there was a danger piece to it. We did 
some carveouts for the insurance industry for their hedging and 
their covering and all of that stuff, went to the Senate. They 
said, no, we are just--we don't like it, but we will do a few 
exceptions. And then, it went to the Conference Committee who 
said, you can't do this except--and they go through all of the 
market making, insurance kinds of issues, foreign banks, 
holding companies. And now, we have placed the regulators with 
the responsibility to take what I think--Section 619 is a 
pretty prescriptive Section. We ask them to make rules from 
this to try to deal with who can trade and who can't, and when 
can they and when they can't. So, from my point of view, I 
think we did a pretty good job.
    I appreciate some of the comments Mr. Peebles and you, Mr. 
Standish--and do we have two Englishmen on the panel today?
    Mr. Johnson. I am also an American, Congressman.
    Mr. Perlmutter. I know, but--
    Mr. Johnson. The accent, yes, does originate elsewhere.
    Mr. Perlmutter. Okay. All right. Americans, but English by 
birth? Okay. It is nice to have you guys on the panel.
    Mr. Standish. We came over on separate boats.
    Mr. Perlmutter. Okay. So, let's go back. We are where we 
are, we had a tremendous fall, and it may be a trillion dollars 
in costs and inefficiency to the capital market, but by my 
calculation, just the drop in the stock market between the 
summer of 2008 and the end of 2008 was 6,000 points. That is 
$1.3 billion per point or $7.8 trillion. That is $26,000 for 
every man, woman, and child in America. And so, we have to deal 
with that. I have to deal with that.
    I don't think we can delay this any further. We are not 
going to go back to Glass-Steagall, that is the bright-line 
test.
    Mr. Carfang, do you disagree with what I have said? Don't 
we have to have some restrictions in there?
    Mr. Carfang. I absolutely agree that unbridled risk-taking 
should not be supported by taxpayers, by deposit insurance. The 
issue is the gray area and the lack of clarity around the 
regulations and the lack of a precise definition of proprietary 
trading. Much of what could be falling into this gray area has 
become standard risk-taking practices that every company uses, 
and even individuals use. And without that lack of clarity, the 
fear on the part of corporate treasurers is banks will err on 
the side of conservatism and withdraw from businesses, making 
medium-sized to small businesses totally without access to 
capital raising and risk management tools. We absolutely agree 
that--
    Mr. Perlmutter. So my question to you then is, I am not 
sure it is the rulemaking as it is getting rid of--from your 
position--getting rid of Section 619.
    Mr. Carfang. We already have a robust system of capital 
requirements that Basel 2 is making even stronger with the 
additional capital requirements for systemically important 
institutions. In addition to that, regulators have substantial 
latitude in terms of the risk weighting of assets on bank 
balance sheets, and I think that is where you manage the 
problem, not simply coming up with hundreds of pages of 
prescriptions on how 3 million U.S. treasurers should do their 
job every day. That is not doable.
    Mr. Perlmutter. Thank you.
    Mr. Renacci [presiding]. Thank you. I yield 5 minutes to 
myself.
    Mr. Elliott, in the book, you write that we will survive 
the implementation of the Volcker Rule, but that it is an 
unnecessary, self-inflicted wound. You also write that you 
would like to see Congress repeal the rule.
    Is it possible for the regulators to adopt a Volcker Rule 
that does not have the negative consequences you describe, or 
has Congress given the regulators a mandate that simply cannot 
be fulfilled in a way that the benefits will outweigh the 
costs?
    Mr. Elliott. Frankly, I think it is the latter. I think 
there is such a lack of clarity as to what proprietary trading 
is, an inherent lack of clarity that there isn't some platonic 
answer that if we just searched for it, we would find it. It is 
inherently subjective and an arbitrary choice. It creates all 
these other issues.
    I would rather have seen, as I mentioned, an approach 
similar to the Basel approach. If you end up feeling that isn't 
nearly conservative enough, then quadruple the levels or 
something, but at least it would say, we are going to measure 
risk and we are going to measure the capital to take the risk, 
and we will make sure there is enough.
    Mr. Renacci. It is interesting because one thing I seem to 
have learned today from both panels is there is still a lot of 
uncertainty in the implementation.
    Mr. Marx, you testified that the Volcker Rule will reduce 
liquidity, which will have a negative effect on Fidelity's 
customers. Can you expand on that? Who are your customers? Why 
do they invest with Fidelity? What does reduced liquidity mean 
for them? Will the Volcker Rule mean that your customers may 
have to work longer to retire or won't be able to save as much 
for their children's education, for example, or things like 
that?
    Mr. Marx. Sure. As I mentioned in my statement, the 
customers that we have are retail investors, parents saving for 
college for their children, 401(k) pension plan participants, 
institutional investors as well. When I talk about the fact 
that it is going to cost more, I talk mostly in the markets 
arena where the transaction costs are going to be precipitously 
higher, depending upon the asset class that you are referring 
to. So, the ability for investors to get in and out of funds 
with regards to redemptions, the ability for issuers where they 
are trying to come into the market, it is going to give us a 
moment of pause as far as investments on behalf of our 
shareholders, and therefore ask for more from issuance. All 
around it is going to cost more people, it is going to cost the 
issuers whether they are corporations or municipalities, in 
order to give us the protection that we need for our investors. 
And that is just the buffer, that is not that they are getting 
something incremental in a new issue. It is just to give them 
the buffer to get out from the liquidity perspective.
    Mr. Renacci. Do you have some modifications that you think 
would work, that would make the Volcker Rule work as far as 
liquidity in bringing some of those issues to the table?
    Mr. Marx. I think at a high level, the most important 
thing--there are two or three important things. One is really, 
truly identifying the difference between principal risk-taking 
and proprietary speculative risk-taking. I think if you can 
take the time to figure out how to separate the two, you are 
going to be in a lot better space, and it will allow dealers to 
feel more comfortable that they are not going to get in trouble 
with the regulators. I think that is the biggest thing.
    The second issue for me is when you think about this 
legislation and other legislation that is trying to be enacted 
right now, it is too granular. You are trying to solve for all 
of the answers at once. And I think if you take it up--we use 
the term ``take it up''--to 50,000 feet as opposed to try to 
get it all done at 10,000 feet, and you give it time to sort of 
focus through, you are going to realize what the unintended 
consequences are as opposed to all of a sudden them being right 
there for you.
    Mr. Renacci. And again, I think your response relates back 
to a lot of things I have heard today about just trying to 
figure out the differences, and we need to take that time.
    Professor Johnson, if market making becomes the purview of 
nonbanks because it is difficult to distinguish from 
proprietary trading, won't the risks to the financial markets 
be even greater given that nonbank firms like MF Global would 
not be subject to the same strict oversight that bank holding 
companies are?
    Mr. Johnson. No. No, Congressman, not at all. Under Dodd-
Frank, you have the ability, the regulators have the ability to 
designate any institution, any financial institution as 
systemically important and therefore to regulate them.
    I am well aware of the arguments put forward by Professor 
Darrell Duffie, for example, in the paper he submitted and you 
put into the record, but it doesn't make any sense. If there is 
anybody who is a significant player becoming a significant 
market maker who you think is generating potential damage to 
the financial system, they can absolutely be covered under the 
systemically important provisions of the Dodd-Frank Act.
    Mr. Renacci. Thank you. My time has expired. I now 
recognize Representative Carney for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman, and thank you to the 
panel for coming. I must apologize; I wasn't here for your 
opening statements, so I am probably going to ask some of you 
to repeat some of what you said.
    But in the first panel, I know some of you were here, 
Governor Tarullo said that if there is--kind of an astounding 
comment--a better idea out there, we are open to it. Does 
anybody have a better idea? I have heard some specifics, but 
does anybody have a better idea of an approach?
    That is one question, and part of that question is, I have 
heard some of you say that you don't think it is possible to 
make the distinction clearly enough, I think Mr. Elliott, 
between market making and proprietary trading. And so, I guess 
I would be interested in what everybody thought about that. So, 
start off with those two quick questions, and I only have 5 
minutes. Please.
    Mr. Carfang. Sir, you know, it is our sense that among the 
better ideas are many of the regulations that are already in 
place, as I mentioned earlier, on capital requirements and on 
risk weightings. There are four major pieces of regulation that 
are impacting corporate treasurers, none of which have been 
tested: the capital requirements of Basel 2; the Volcker Rule; 
money fund regulations; and derivatives regulations. We think a 
better idea is to not do all four of them at the same time.
    Mr. Carney. Okay. He mentioned Basel 2. How about Basel 3? 
Are you saying that the Volcker Rule and Basel 3 are 
unnecessary, they are--in some ways, Basel 3 accomplishes what 
the Volcker Rule is attempting to accomplish?
    Mr. Standish. Yes, Congressman, I do. I think the issue 
currently with Basel 3 is the current overall implementation 
plan is 2019 globally. I would contend that should be 
accelerated and sped up, and it will, I believe, meet certainly 
all of the checks and balances on the financial system.
    Mr. Carney. I don't know the details, but don't Basel 2 and 
3 essentially deal with capital requirements?
    Mr. Standish. They do, but it take it to another level. 
They focus not just on increasing trading book capital. One of 
the negatives, I will admit, is that it penalizes or applies 
more capital to support market-making trading activities in 
lower-rated securities. So where I do have an issue with 
someone else stepping up and supporting markets is in smaller, 
lower-rated companies. I think that will end up being a bit of 
a black hole in the market that should concern the Members.
    Mr. Carney. Unless there is somebody else who has a better 
idea--quickly, please.
    Mr. Johnson. In my written testimony, Congressman, I 
suggested that putting the firms in charge of compliance, which 
is what--
    Mr. Carney. I read that.
    Mr. Johnson. That strikes me as not a good idea, and that 
is a relatively easy thing for Mr. Tarullo and his colleagues 
to address.
    Mr. Carney. Right. So I would like to go to this fixed-
income market question. So what dynamic are you saying will 
create the effects that you just mentioned in response to Mr. 
Renacci's question? What does the Volcker Rule limitations do 
to the fixed-income? I have talked to some of the folks from 
Fidelity and Vanguard, and I have heard some of those 
arguments. I would like you to state them for the record.
    Mr. Marx. I think if you take a very basic example, if you 
take a look at the high-income market versus the investment-
grade corporate market, the investment-grade corporate market 
is probably 3 times the size from a new issue perspective on an 
annual basis over the last couple of years. So if you think 
that there is any sort of fear that liquidity will dry up, 
which it will, based upon people's inability to take risks or 
for fear of dealers to take risks because they don't want to be 
at odds with the regulators and the rules that are being 
implemented, you are going to see a market that is 3 times the 
size of the high-income market approach spreads that are in 
liquidity that are in the high-income market, and that is a 
significant change as far as the liquidity that is going to be 
provided.
    Mr. Carney. So people have their hands up; would you like 
to add to that?
    Mr. Peebles. I completely agree with what Mr. Marx just 
said. To give you a very simple example, so Fidelity or 
AllianceBernstein manages a mutual fund, but let's say we own 
all corporate bonds in that mutual fund. Today, there is a 
trading notion that takes place in those bonds, and tonight we 
receive redemption orders from our clients, right? And those 
redemption orders we process at today's closing price. We wake 
up tomorrow, we see collectively that we have redemptions, we 
have to go in the marketplace to sell the securities to fund 
those redemptions. The price that we expected to be there as of 
close of last night is very far away. So the 65-year-old woman 
from Iowa who wanted to raise $1,000 now has $750 in terms of 
her redemption. That is a big problem.
    Mr. Carney. I have 10 seconds left. How do you fix it? I 
had another part of that, but I only have 10 seconds. Is there 
a fix?
    Mr. Marx. To me, the fix truly is identifying the 
difference between principal risk-taking and proprietary risk-
taking. We need prudent risk-takers in the market and not 
speculative risk-takers.
    Mr. Carney. Mr. Johnson, I would love to hear from you, if 
my colleague from Ohio would allow it.
    Mr. Johnson. Congressman, it strikes me that we should have 
more confidence in the market. The assumption here is that the 
liquidity will only be provided by the existing big banks that 
are highly subsidized, and if you withdraw those subsidies, 
that somehow the liquidity provision will go away. Why? If it 
only exits because of subsidies, that may be true. But if there 
is genuine opportunity there, if there is really profit to be 
made in these markets, making the markets, that business will 
shift. That is the problem with the Oliver Wyman study, very 
extreme assumptions, but the logic should be that the market 
will adapt, that is the basic principle of how the deep 
financial markets work.
    Mr. Carney. Thank you.
    Mr. Renacci. I want to recognize Ranking Member Maloney for 
5 minutes.
    Mrs. Maloney. First, Mr. Turbeville, you had your hand up, 
you wanted to comment?
    Mr. Turbeville. Yes, there is another way to look at this, 
is that when someone goes out and places a block, and they are 
going have a liquidation or they need to buy some securities, 
they go to a bank and they put the block with the bank. And 
what is happening there is that institution is renting the 
bank's balance sheet because they are saying, we are going to 
move these securities at a price over to your balance sheet.
    So the question is this, and Professor Johnson is right: Do 
you want the balance sheet that is rented to be a subsidized 
balance sheet supported by too-big-to-fail, or do you want it 
to be an unsubsidized balance sheet with an institution that is 
not subject to the safety net and subject to too-big-to-fail 
guarantees?
    Mrs. Maloney. Thank you. Mr. Peebles--and I know that many 
people have questions on it and we can follow up with written 
questions on it--are you familiar with the global legal entity 
identifier?
    Mr. Peebles. No, I am not.
    Mrs. Maloney. Anybody on the panel? You are?
    Mr. Turbeville. Yes.
    Mrs. Maloney. Do think that this identifier will enable 
financial regulators and the public sector to have a better 
review of the benefits and to better control what is happening? 
Do you think that this is important to manage finance and 
prevent failures and risk the identifier?
    Mr. Turbeville. Aside from the issues we are talking about 
today, perhaps actually to be able to monitor the markets and 
understand what is going on, having data is absolutely the most 
important thing.
    The first threshold issue is the legal entity identifier, 
which is to sort out what the legal entities are that are 
involved in all these transactions. I believe the fact is that 
Lehman Brothers had 2,500 or more separate entities inside it 
when it went under and caused a massive systemic problem. So 
the legal entity identifier is the linchpin, the first of 
getting a handle on what is actually going on in the financing 
markets.
    Mrs. Maloney. Who do you believe should bear the cost of 
implementing the legal identifier?
    Mr. Turbeville. I believe the cost--if I were in charge of 
everything, the industry would bear the cost.
    Mrs. Maloney. And going on to the implementation of the 
Volcker Rule, do you believe that we will see an increase in 
trading firms? People are saying people will be moving 
overseas. There is a likelihood they might move across the 
street and open a trading firm. Can you comment on whether or 
not you think this will have an impact on increasing trading 
firms or not?
    Mr. Turbeville. I that is right. I think it will increase 
trading firms and trading will change in the different firms. 
Even Professor Duffie in his paper talks about that. Nobody 
really believes this business. If it is a sound business, if it 
is profitable, if it makes sense, if the trading business makes 
sense, that people will find a place to do it and the capital 
will find its way to those institutions.
    Mrs. Maloney. But won't that increase liquidity?
    Mr. Turbeville. I think it not affect liquidity, because I 
think what will happen is it will find its own surface. I think 
what will happen, though, is that if you don't have capital 
devoted to trading that is too-big-to-fail kind of capital, 
subsidized, that some kind of trading that probably doesn't--I 
am sure it doesn't add anything to liquidity, but probably is a 
drag on the economy--some of the layers of intermediation and 
some of the trading that has nothing do with liquidity and 
nothing to do with the things that have been talked about on 
this panel will dry up. That kind of trading will cease.
    Mrs. Maloney. Will too-big-to-fail banks' revenues increase 
or decrease in your opinion?
    Mr. Turbeville. I think too-big-to-fail banks' revenues 
will decrease, except for the years in which they blow 
themselves to smithereens and create massive financial problems 
for the economy. But I think also their capital will shrink and 
their businesses will change.
    Mrs. Maloney. In your opinion, what will be the impact on 
the financial industry? And more importantly, how will market 
hedge funds, public and banks react to increased trading 
volumes? What effect will this increased trading volume have on 
the whole system?
    Mr. Turbeville. The overall volume may or may not go up. 
The liquidity will survive and that liquidity purpose will be 
fulfilled. It is entirely possible--and I meant to suggest that 
in my oral statement--it is possible that the system itself 
now, the financing system and the trading system is efficient 
from the bank's perspective but is not efficient from corporate 
America's perspective. So that the actual cost of financing and 
raising capital is higher now than it was 50 years ago. There 
is some research that suggests that. So it is entirely possible 
that in the post-Volcker world, if indeed moving proprietary 
trading out of banks causes some of this not productive trading 
except for financial institutions to go away, that it will 
actually be beneficial.
    Mr. Renacci. I want to thank--did you want additional time?
    Mrs. Maloney. I would like Mr. Johnson to comment if he 
could briefly, there were many causes out there for the 
financial crisis, but would you say that one of them was the 
inability of regulators and interested parties to see financial 
transactions and track what is happening and see what is 
happening? One of our goals is that we created an Office of 
Financial Research that would be capable of providing risk 
assessment and stress tests based on realtime data, and would 
that have an impact that could prevent loss and prevent crises. 
Some CEOs who testified before us said that this central system 
could be very effective in preventing crisis in the future. 
What is your opinion?
    Mr. Johnson. Congresswoman, I was the chief economist of 
the International Monetary Fund in 2007 through August 2008. I 
was involved in discussing the details of the financial crisis 
as it developed, including at the highest levels of government, 
both in this country and around the world. And the lack of data 
was a very big problem.
    But my concern is that even now, even after the creation of 
the Office of Financial Research, with derivatives markets in 
particular remaining so completely opaque in many regards and 
with cross-border transactions continuing to be extremely 
complex, are now under massive pressure because of what is 
happening in Europe, I am afraid the sensible steps taken to 
collect better data and to provide better analysis are not 
enough. You also need to supplement that with many other 
measures, including the Volcker Rule.
    Mrs. Maloney. Thank you.
    Mr. Renacci. Mr. Perlmutter?
    Mr. Perlmutter. In keeping with the theme dealing with 
England, I would like to offer and place in the record an 
excerpt from a chapter by Adair Turner, a professor at the 
London School of Economics, on the future of banking.
    Mr. Renacci. Without objection, it is so ordered.
    Again, I want to thank the panel members for their 
testimony today. The Chair notes that some Members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for Members to submit written questions 
to these witnesses and to place their responses in the record.
    With that, the hearing is adjourned.
    [Whereupon, at 1:40 p.m., the hearing was adjourned.]



                            A P P E N D I X



                            January 18, 2012

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