[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                     THE IMPACT OF THE VOLCKER RULE 
                        ON JOB CREATORS, PART II

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 5, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-62


                                 ______

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York           PATRICK MURPHY, Florida
STEVE STIVERS, Ohio                  JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana          JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 5, 2014.............................................     1
Appendix:
    February 5, 2014.............................................    65

                               WITNESSES
                      Wednesday, February 5, 2014

Curry, Hon. Thomas J., Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    11
Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance 
  Corporation....................................................    12
Tarullo, Hon. Daniel K., Governor, Board of Governors of the 
  Federal Reserve System.........................................     8
Wetjen, Hon. Mark P., Acting Chairman, Commodity Futures Trading 
  Commission.....................................................    14
White, Hon. Mary Jo, Chair, U.S. Securities and Exchange 
  Commission.....................................................     9

                                APPENDIX

Prepared statements:
    Moore, Hon. Gwen.............................................    66
    Curry, Hon. Thomas J.........................................    67
    Gruenberg, Hon. Martin J.....................................    80
    Tarullo, Hon. Daniel K.......................................    98
    Wetjen, Hon. Mark P..........................................   105
    White, Hon. Mary Jo..........................................   110

              Additional Material Submitted for the Record

Ellison, Hon. Keith:
    American Banker article by Donald R. van Deventer entitled, 
      ``Volcker is Right. Prop Trading Kills,'' dated February 
      20, 2012...................................................   118
Curry, Hon. Thomas J.:
    Written responses to questions submitted by Representatives 
      Garrett, King, Ross, Fincher, Hultgren, Hurt, and Ellison..   121
Gruenberg, Hon. Martin J.:
    Written responses to questions submitted by Representatives 
      Garrett, Ellison, Luetkemeyer, Hurt, Hultgren, Fincher, 
      Ross, and King.............................................   132
Tarullo, Hon. Daniel K.:
    Written responses to questions submitted by Representatives 
      Fincher, Garrett, Hultgren, Hurt, King, Moore, and Ross....   148
White, Hon. Mary Jo:
    Written responses to questions submitted by Representatives 
      Hurt, Garrett, King, Ross, Fincher, and Hultgren...........   165


                     THE IMPACT OF THE VOLCKER RULE
                        ON JOB CREATORS, PART II

                              ----------                              


                      Wednesday, February 5, 2014

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Royce, Lucas, 
Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, 
Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Mulvaney, 
Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, Rothfus; 
Waters, Maloney, Velazquez, Sherman, Meeks, Capuano, Lynch, 
Scott, Green, Cleaver, Ellison, Himes, Peters, Carney, Foster, 
Kildee, Murphy, Sinema, Beatty, and Heck.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    This hearing is entitled, ``The Impact of the Volcker Rule 
on Job Creators, Part II.'' Members will recall that Part I was 
held on January 15th, when we heard from our private sector 
witnesses. Today, we will hear from the regulators who 
promulgated the rule.
    I now recognize myself for 5 minutes for an opening 
statement.
    During our last Volcker Rule hearing, I mentioned receiving 
correspondence from a constituent of mine, Joseph of Mabank, 
Texas, who wrote me, ``I am a disabled veteran. I have been 
without work for over a year. All I want is to have a good 
paying job.''
    I receive way too many letters like this from folks like 
Joseph who are struggling to make ends meet, struggling in this 
struggling economy. There is William, who lives in Ben Wheeler, 
who says, ``I have been out of work for the longest time, since 
my teenage years.'' Tina from Canton wrote me, ``I haven't been 
able to find a job suitable for my family's needs.''
    I do not recall a time, ever in my lifetime, when the 
challenges of upward mobility and economic opportunity for low- 
and moderate-income Americans have been greater. Not 
surprisingly, I also do not ever recall in my lifetime when the 
regulatory red tape burdens on our job creators in capital 
markets have been greater. I believe, as do most, that there is 
a clear, direct causal link between the two.
    Today's exhibit: the 932-page complex, confounding, 
confusing, and convoluted Volcker Rule. Like most of the other 
400 rules in the Dodd-Frank Act, the Volcker Rule is aimed at 
Wall Street, but hits Main Street, and regrettably people like 
Joseph and William and Tina have become collateral damage.
    The Volcker Rule, I believe, remains a solution in search 
of a problem. Of the 450 financial institutions that failed 
during or as a result of the financial crisis, not one fell 
because of proprietary trading. In fact, financial institutions 
that varied their revenue streams were better able to weather 
the storm, keep lending, and support job growth.
    Instead, bank failures, as we all know, came largely from a 
concentration in lending in the poorly underwritten residential 
real estate and sovereign debt markets. And who helped steer 
them into these markets? Regrettably, Washington. Between 
Fannie Mae and Freddie Mac's affordable housing goals, the CRA, 
and our SRO designations, just to mention a few, Washington 
regulators regrettably incented and blessed it all.
    The great public policy tragedy of the financial crisis was 
not that Washington failed to prevent the crisis, but instead 
that Washington helped cause it. Now, with the Volcker Rule, 
Washington is doubling down on its catastrophic mistakes.
    With something as large, momentous, and as anticipated as 
the Volcker Rule, surely it must offer great benefits to our 
financial system. But what are they? Paul Volcker himself has 
said that proprietary trading was not a central cause of the 
crisis. Former Treasury Secretary Geithner has expressed a 
similar view. And I am unaware of any economist or regulator 
who has been able to quantify precisely the Volcker Rule's 
benefits.
    Many say the rule reduces risk in the financial system. 
That may be true. The studies that I have seen are mixed at 
best. And I remind everyone that without risk, there is no 
investment. Less investment means less capital formation. Less 
capital formation means fewer job opportunities for Joseph, 
William, and Tina, and the tens of millions who remain 
underemployed and unemployed in this economy.
    If Washington believes we need to remove more risk from the 
system, perhaps then we should concentrate on substantially 
outlawing mortgage risk, which is at the epicenter of the 
crisis, but arguably the CFPB's QM rule has largely 
accomplished that already.
    As the benefits of Volcker remain questionable, evidence is 
mounting that the cost will be enormous. There have been 18,000 
comment letters, the vast majority of which have been negative, 
that ultimately the rule will be costly to hard-working 
American taxpayers. The Public Utility Commission in my native 
Texas has warned that the Volcker Rule threatens my 
constituents with ``higher and more volatile electricity 
prices.''
    Then there are the regulators' own estimates which show 
that complying with Volcker will require 6.2 million hours. 
That is hours in capital which could have been devoted to 
growing our economy and creating more jobs. There is research 
out of Washington University that Volcker will take $800 
billion out of our economy, the equivalent of $6,900 out of 
every American household's paychecks. There is ample testimony 
before our committee that companies will be faced with 
artificially higher borrowing costs and will be forced to hoard 
more cash.
    As the evidence has mounted, The Wall Street Journal has 
editorialized that the Volcker Rule creates ``a limitless 
supply of ambiguity.'' And The Economist has stated that the 
rule gives us ``less liquid markets, higher transaction costs, 
a weaker financial system, and, as usual, richer lawyers.''
    Based on the evidence, it appears that the costs outweigh 
the benefits, but the regulators who promulgated the rule don't 
know for certain because none of the agencies conducted a cost-
benefit economic analysis. In other words, they did not examine 
whether the Volcker Rule actually helps or hurts Joseph, 
William, Tina, or any of the others. Some say we need the 
Volcker Rule to hold Wall Street accountable. Wall Street must 
be held accountable, but Washington must be held accountable as 
well.
    Wall Street is going to make money with or without the 
Volcker Rule. It is Americans on Main Street, the people who 
sent us here, who are being hurt daily in the regulatory 
tsunami of Obamacare, Dodd-Frank, and now the Volcker Rule. 
This committee and this Congress must and should do better.
    The Chair now recognizes the ranking member, Ms. Waters, 
for 4 minutes.
    Ms. Waters. Thank you, Mr. Chairman.
    I would like to welcome our distinguished witnesses to 
today's hearing and thank them for working tirelessly to 
complete this crucially important rule. Thanks to their hard 
work, we are making progress toward a stronger, sounder 
financial system. It has been 5 years since the worst of the 
financial crisis. Our Nation is still taking stock of the 
causes and the damage done. Though we can't identify every 
cause of the crisis with absolute certainty, we do know that 
certain types of risky behavior were major contributors.
    One of these types of behavior was proprietary trading by 
big banks, of which we saw a significant increase in the 
buildup to the collapse. In fact, at the biggest banks, 
proprietary trading revenues steadily increased in the lead-up 
to the crisis as banks acquired massive positions in subprime 
mortgage-backed securities. These positions were tremendously 
profitable until the music stopped and the market for these 
securities crashed. And as we now know, losses from proprietary 
trading, among other factors, required taxpayers to step in to 
bail out the system.
    After the worst of the crisis, Congress enacted 
comprehensive Wall Street reform to ensure such an emergency 
would never happen again. Undoubtedly, a centerpiece of that 
reform was the Volcker Rule. I believe that a properly enforced 
Volcker Rule will protect American taxpayers from the 
consequences of risky bank behavior and make certain that banks 
insured by our Nation's citizens get back to the core business 
of making loans and financing our small businesses.
    To our regulators who are here today, I commend you for 
working together so closely to ensure we have the strongest, 
most workable rule possible. During this important rulemaking, 
you have sought feedback from stakeholders across the spectrum, 
poring through tens of thousands of comments and holding dozens 
upon dozens of meetings.
    At the same time, you have already worked quickly and 
effectively to address issues related to the rule that have 
come up in the last month, including the issue related to 
collateralized debt obligations (CDOs) backed by trust 
preferred securities (TruPS).
    I am very pleased with how you have managed to work 
collaboratively across your agencies. And given that the strong 
and consistent enforcement of the Volcker Rule is one of my top 
priorities, I am even more pleased that you have formed a 
working group which will allow your agencies to better 
coordinate on implementation of the rule across the financial 
sector.
    My understanding is that your agencies have already begun 
to work, holding an initial meeting to discuss coordination of 
responses and supervision of financial institutions. This type 
of cooperation is to be commended and is critical to ensuring 
that the agencies' implementation of the Volcker Rule is 
strong, coordinated, and effective.
    Simultaneously, I hope that your agencies will take 
advantage of the long lead-up time afforded to you to collect 
data from banking entities which will inform how best to 
coordinate enforcement.
    I would like to once again thank the witnesses for 
appearing before this committee today. I look forward to 
working with you to ensure our regulators are faithfully 
enforcing this rule, which is crucial to the success of the 
Wall Street Reform Act.
    I look forward to the witnesses' testimony, and I will 
yield 30 seconds to the gentlelady from New York.
    Mrs. Maloney. Thank you. And I thank the ranking member for 
yielding.
    And in all due respect to our chairman, I thank you for you 
calling this hearing, but when you said that the Volcker Rule 
is a solution in search of a problem, I would say that the 
Americans who suffered a $16 trillion loss in our economy, the 
loss of their homes, the loss of their jobs, and the loss of 
their savings are grateful that Congress acted in a way to try 
to prevent it in the future, and the Volcker Rule is an 
important part of the Dodd-Frank reform bill.
    Thank you for yielding.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, the Chair of our Capital Markets Subcommittee, for 
2\1/2\ minutes.
    Mr. Garrett. Thank you, Mr. Chairman.
    Nearly 3\1/2\ years after enactment of Dodd-Frank, the 
government's rulemaking assembly line continues to bury 
American job creators with an avalanche of red tape. And so 
today, we meet again to discuss yet another example of 
government rulemaking gone wrong, the so-called Volcker Rule.
    Instead of taking the time to address the causes of the 
financial crisis, such as oversubsidization of the housing 
market, and the Federal Reserve's failed regulatory monetary 
policy, Congress does come up with a solution in search of a 
problem: Exhibit A, the Volcker Rule, that tries to ban 
proprietary trading, which did not cause the financial crisis.
    And while the regulators here today had no choice but to 
draft this rule, they appear to have made the situation worse 
by failing to coordinate with each other and by ignoring the 
legal requirements for agency rulemaking. For example, despite 
receiving over 19,000 comment letters, and making significant 
changes to the Volcker Rule, the regulators failed to repropose 
the new rule for public comment. As a result, regulators are 
already being asked to address, after the fact, a variety of 
problems with the rule that threaten the ability of American 
companies to grow and make jobs.
    The regulators also failed to support the Volcker Rule with 
an adequate economic analysis, as required by law. Without this 
basic analysis, we really don't know the detrimental effect it 
will have on the economy and those who invest in it. This is 
simply unacceptable.
    Another major concern is that banking regulators were very 
selective and counterproductive in the use of safety and 
soundness authority. They had no problem concocting a rationale 
to exempt potentially very risky foreign sovereign debt that 
could actually make banks less safe and sound, but they have 
refused to use the same authority to exempt CLOs from the rule, 
a move that actually makes them safer. Not to mention the fact 
that Congress never intended for CLOs to be covered in the 
first place.
    Last, but not least, there is the apparent inability of the 
regulators to cooperate and coordinate during this process, 
with one news report indicating that regulators agreed to 
negotiate the rule ``only when tempted by fast food fried 
chicken.'' This, coupled with the agencies issuing a separate 
release and setting different implementation deadline, raises 
the troubling question of how the Volcker Rule is going to be 
implemented and enforced in a rational and coherent manner.
    All of this combined, Mr. Chairman, given all these 
problems, I believe it is time to seriously consider 
consolidating some of these agencies, perhaps creating a more 
streamlined, efficient, and accountable financial regulatory 
system.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Peters, for 2 minutes.
    Mr. Peters. Thank you, Mr. Chairman.
    And I would like to thank our witnesses for being here 
today and for all of your work in overseeing our financial 
system.
    I was first elected in 2008, during the very height of the 
financial crisis, and it was a very frightening time. Our 
Nation was shedding over 800,000 jobs per month. In my home 
State of Michigan, there were very real fears that this crisis 
would bring about the liquidation of General Motors and 
Chrysler. But now American automakers are creating jobs and are 
boosting sales, and our financial regulators are implementing 
the historic Dodd-Frank law, and our economy is growing.
    We can't go backwards. We can't go back to allowing the use 
of government-insured money to make highly speculative bets on 
prior bets and then again on other bets. These highly complex 
and speculative derivatives and other practices threatened the 
entire financial system. We can't go back to shedding millions 
of middle-class jobs because of Wall Street overreach.
    American markets allocate capital more efficiently than 
anywhere else in the world, and I look forward to hearing how 
our regulators are balancing the need to protect investors 
while maintaining robust access to capital for entrepreneurs.
    I yield back my time.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, the Chair of our Financial 
Institutions Subcommittee, Mrs. Capito, for 1\1/2\ minutes.
    Mrs. Capito. Thank you, Mr. Chairman. And I want to thank 
our witnesses for being here with us today.
    Two months ago, the agencies testifying before our 
subcommittee released the final Volcker Rule. Since the 
announcement of the final rule, this committee's members have 
been inundated with concerns about the effect this complex 
rule--although the original intent of the rule was to limit 
trading activities of the largest banks, the final rule is 
having a measurable impact on Main Street businesses and 
financial institutions. Shortly after the rule's release, 
bankers in West Virginia reached out to me with concerns about 
their ability to hold certain securities under the new rule. 
They feared that the rule's requirement to divest certain 
assets would force them to take immediate write-downs. This 
would have had to occur within 2 or 3 weeks before the end of 
the calendar year.
    The agencies reacted and issued an interim rule on January 
14th that provided some clarity on the ability of banks to 
invest in collateralized debt obligations backed by trust 
preferred securities. But questions still do remain. Although 
this interim rule is a step in the right direction, the 
majority of confusion could have been avoided if there had been 
a public comment on this section of the rule.
    No one discounts the complexity of the rule and the 
probability that there would be significant unintended 
consequences. Unfortunately, what we are left with is a 
situation where the only way for the public to comment on these 
policies is to file lawsuits or engage Congress. This is a 
disservice to the rulemaking process and the public.
    I urge the witnesses here today and the agencies they 
represent to swiftly address these outstanding issues. And I 
thank you for coming before the committee today.
    Chairman Hensarling. The ime of the gentlelady has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    First of all, the Volcker Rule is very important. It does a 
very important thing in terms of protecting proprietary 
trading. But there is an area we need to look very carefully 
at, and that is the handling of what are known as CLOs.
    My understanding is that CLOs are products which help 
provide large amounts of credit to small businesses. They are 
debt securities, and they performed well through the greatest 
financial crisis of our time, and they continue to perform 
well. They are not toxic. They didn't cause the problem. Banks 
bought this CLO debt because they were prudent investments 
which offered a reasonable rate of return. And included among 
these banks are numerous small and regional and community 
banks.
    But here is the rub in this: Because of interpretation of 
the final rules of Volcker, of implementing Volcker, these same 
banks could very well face a situation where they have to dump 
$80 billion worth of this debt in a fire sale. If these banks 
get 90 cents on the dollar back, we are talking about wiping 
out $8 billion of bank capital only because of what is 
conceived to be overly broad rulemaking.
    So it is my hope that in this discussion today we can have 
a clear understanding of the interaction of CLOs, why this is 
taking place, and how we can exercise the situation so that it 
helps our financial system and not put it in sort of a 
straightjacket here.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, the Chair of our Oversight and Investigations 
Subcommittee, for 1 minute.
    Mr. McHenry. In the last 3\1/2\ years, mounting evidence 
affirms that Dodd-Frank's more than 400 rules continue to miss 
the mark. At its core, Dodd-Frank irresponsibly disregards the 
causes of the financial crisis, namely, Fannie and Freddie, 
failed prudential regulation, and off balance sheet vehicles. 
Also, instead of explicitly implementing regulations which not 
only codified Dodd-Frank's taxpayer-funded bailouts, but also 
recklessly impeded our economic growth and our international 
competitiveness.
    In December, the hasty implementation of the Volcker Rule 
upheld Dodd-Frank's dangerous reputation when all five 
regulators refused to subject the rule to rigorous economic 
analysis. By refusing to repropose the rule, the Obama 
Administration and the regulators here today at this hearing 
have gambled on an economically unproven rule that does not get 
to the root of the last financial crisis and may, in fact, be 
at the root of the next one.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison, for 2 minutes.
    Mr. Ellison. Thank you, Mr. Chairman.
    I want to congratulate you, the regulators, for your 
outstanding collaborative and collective effort to implement 
the Volcker Rule. It is a major step toward ensuring that 
Americans will not be called upon again to repeat expenditures 
like the Troubled Asset Relief Program (TARP).
    TARP was a $700 billion investment which was passed in 
2008. It buoyed more than 800 financial institutions during the 
financial crisis. The Volcker Rule will also stop high-risk 
investment trading, such as JPMorgan Chase's (JPMC's) London 
Whale, the enormous investment by JPMC's investment division, 
which resulted in the loss of more than $6 billion.
    The creation of the new traffic laws for Wall Street is 
complicated, and we must all pay attention to your regulatory 
agencies' move forward with implementation and enforcement. I 
strongly support robust regulation, which means that I want to 
see greater funding for the SEC and the Commodity Futures 
Trading Commission (CFTC).
    Of course, I urge our regulators here to be open and 
receive comment, as you so amply have. But I appreciate your 
efforts over the past few years to improve the rules of the 
road for the financial markets to reduce volatility and 
generate economic activity. You have achieved this in your 
balanced and clear rule.
    And I want to say that for the many people who act as if we 
did not have a catastrophic financial crisis just a few years 
ago, and behave as though you just started writing rules all on 
your own accord, I sympathize with the frustration you must 
feel with that. But at the end of the day, I think we have a 
safer financial system because of the efforts that you have put 
forward. Thank you.
    Chairman Hensarling. The gentleman yields back.
    Today, we welcome the heads of the five regulatory agencies 
that have developed, promulgated, and voted to approve the 
Volcker Rule. First, the Honorable Daniel Tarullo, who is a 
Governor on the Board of Governors of the Federal Reserve 
System, a position he has held since 2009. Previously, he 
served as a professor of law at Georgetown, and a senior fellow 
at the Council of Foreign Relations and the Center for American 
Progress.
    The Honorable Mary Jo White currently serves as the Chair 
of the U.S. Securities and Exchange Commission, a position to 
which she was confirmed last April. Before that appointment, 
Ms. White served as the U.S. Attorney for the Southern District 
of New York.
    The Honorable Thomas Curry was sworn in as the Comptroller 
of the Currency in April of 2012. Prior to his service at the 
OCC, Mr. Curry served as a Director of the FDIC, and he is 
chairman of the NeighborWorks America board of directors.
    Martin Gruenberg is the Chairman of the Federal Deposit 
Insurance Corporation, a position he has held since 2012. We 
welcome him back to Capitol Hill. He previously served on the 
Senate Banking Committee for Senator Sarbanes, clearly not as 
prestigious as having served as a staffer on the House 
Financial Services Committee, but we welcome you back to the 
Hill nonetheless.
    Last, but not least, Mark Wetjen currently serves as the 
Acting Chairman of the Commodity Futures Trading Commission. He 
has been a CFTC Commissioner since October 2011. We welcome him 
back to the Hill, as well. He too bears the burden of being a 
former Senate staffer of the Senate Banking Committee.
    Without objection, each of your written statements will be 
made a part of the record. Each of you should be familiar with 
the system of our green, yellow, and red lighting system. I 
would ask that each of you observe the 5-minute rule.
    Mr. Tarullo, you are now recognized for a 5-minute summary 
of your testimony.

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

    Mr. Tarullo. Thank you very much. Chairman Hensarling, 
Ranking Member Waters, and members of the committee, I 
appreciate the opportunity to testify on the final interagency 
regulation implementing the Volcker Rule.
    With respect to this and all other provisions of the Dodd-
Frank Act, the goal of the Federal Reserve is to implement the 
statute in a manner that is faithful to the language of the 
statute and that maximizes financial stability and other social 
benefits at the least cost to credit availability and economic 
growth.
    The basic approach of the final rule is generally 
consistent with that adopted in the proposed rule. But the many 
comments we received helped us make useful changes and 
clarifications throughout the final rule. Also, of course, the 
London Whale episode allowed staff to test the procedural and 
substantive requirements of the proposed rule against a real-
world example of what should not happen in a banking 
organization.
    The final rule has been modestly simplified from the 2011 
proposal, particularly the portion dealing with proprietary 
trading. Much of the remaining complexity lies in the parts of 
the rule dealing with covered funds, which are driven largely 
by the specific requirements of the statute.
    Because the proprietary trading part of the regulation 
tries to steer a middle course between one-size-fits-all 
requirements on the one hand and very specific requirements for 
all kinds of covered activity on the other, implementation will 
be particularly important in continuing to shape the Volcker 
Rule. We have extended the conformance period until July 2015 
so as to allow the agencies more time to collect relevant data 
from large banking organizations and develop additional 
guidance, and to allow firms more time to put appropriate 
internal mechanisms in place.
    For example, the metrics to be reported by the largest 
banking organizations will help firms and regulators 
distinguish prohibited proprietary trading and high-risk 
trading strategies from legitimate market making, while taking 
account of the differences in particular markets and 
instruments. More generally, one would expect that a good many 
of the uncertainties will be reduced over time as both banking 
entities and regulators gain experience with this new 
regulatory framework.
    Of course, to reach this point, the five agencies 
represented here will need to coordinate their work. Because 
the bulk of the activities encompassed by the statute take 
place in U.S. broker-dealers and national banks, entities for 
which the Federal Reserve is not the primary supervisor, we 
will have a somewhat lesser role in the Volcker Rule 
implementation process. But we still have an important role to 
play. Shortly after adopting the Volcker Rule, the five 
agencies agreed to create an interagency working group to help 
ensure consistency in application of the final rule to banking 
entities within their respective jurisdictions. That group has 
already begun to meet.
    Finally, I would note that the Volcker Rule alone cannot 
assure the safety and soundness of trading operations. It is 
critical that all our agencies take an approach in monitoring 
constraining attendant risks in our largest financial 
institutions that is consistent with these broader safety and 
soundness aims. Capital regulation remains at the core of that 
comprehensive approach.
    Thank you for your attention, and I would be pleased to 
answer any questions you may have.
    [The prepared statement of Governor Tarullo can be found on 
page 98 of the appendix.]
    Chairman Hensarling. Chair White, you are now recognized.

     STATEMENT OF THE HONORABLE MARY JO WHITE, CHAIR, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Ms. White. Thank you very much, Chairman Hensarling, 
Ranking Member Waters, and members of the committee. Thank you 
for inviting me to testify about the final rule implementing 
Section 619 of the Dodd-Frank Act, commonly referred to as the 
Volcker Rule, adopted under the Bank Holding Company Act on 
December 10th by the Federal banking agencies, the SEC, and the 
CFTC.
    The final rule carries out the mandate of Congress. The 
rule reflects an extensive effort by all five agencies to 
design a regulatory framework that is consistent with the 
language and purpose of the statute and that preserves diverse 
and competitive markets.
    Throughout the rulemaking process, Commission staff played 
a critical, constructive, and collaborative role, bringing its 
expertise to bear as a regulator of markets, market 
intermediaries, asset managers, and investment funds. The 
Commission, like the other agencies, received and reviewed 
thousands of comment letters on the statutory mandate and the 
proposed rules, and met with numerous market participants and 
other interested parties.
    The comments covered a wide spectrum of issues, including 
concerns about potential negative market and other economic 
impacts, as well as risks of evasion. The Commission, together 
with the other agencies, carefully considered and responded to 
these comments with a final rule that reduces the potential 
impacts on markets while also addressing concerns about evasion 
of the statutory requirements through a robust compliance 
program.
    It was very important, in my view, that all five agencies 
adopt the same rule under the Bank Holding Company Act and to 
apply and implement the rule consistently based on continuing 
consultation and collaboration. In developing and issuing the 
rule, Section 619 of the Dodd-Frank Act imposed on all of the 
agencies obligations of coordination, consistency, and 
comparability. Market participants, investor advocates, and 
others also all called for a common rule that would be 
consistently applied.
    While the final rule in many respects is similar to the 
proposed rule, there are a number of changes which relate to 
areas of the Commission's expertise that I would just like to 
very briefly highlight.
    The first area is the statutory exemptions from the ban on 
proprietary trading for market making and underwriting, which 
are necessary activities for raising capital and the healthy 
functioning of the U.S. markets. The final rule takes a 
measured but robust approach, benefitting from a consideration 
of commenter views on potential unintended market impacts, 
particularly with respect to liquidity and off-exchange 
markets.
    Another area is the implementation of the statutory 
provisions limiting the ability of banking entities to sponsor 
or invest in hedge funds and private equity funds. Responding 
to extensive comments, the final rule refines the definition of 
a covered fund to exclude certain entities, such as operational 
subsidiaries and joint ventures, which do not present the same 
risks as the covered funds targeted by the statute.
    A third area relates to the cross-border scope of the 
proposed rule, which is and was the subject of a number of 
comments focused on the potential competitive impacts and 
effects on liquidity. The final rule provides that so long as 
the trading decisions and principal risks associated with the 
activities of the foreign banking entity are located outside 
the United States, a foreign banking entity may trade with U.S. 
entities, subject to certain conditions. The approach is 
designed to limit the risk to the United States arising from 
proprietary trading by foreign banking entities while creating 
a reasonable competitive parity between domestic and foreign 
banking entities and helping to ensure that U.S. investors can 
continue to benefit from liquidity provided by foreign banking 
entities.
    As we move forward, we must be alert to both unintended 
impacts and regulatory loopholes. We also appreciate that 
market participants will have an ongoing need for guidance 
regarding questions that will arise as they seek to comply with 
the final rules. To address these questions and concerns, as 
you have heard, the agencies have formed an interagency working 
group that will meet regularly to coordinate the agencies' 
interpretations and implementation of the rule on a going-
forward basis.
    Thank you for providing me the opportunity to testify 
today. I would be pleased to respond to questions.
    [The prepared statement of Chair White can be found on page 
110 of the appendix.]
    Chairman Hensarling. Comptroller Curry, you are now 
recognized for 5 minutes.

STATEMENT OF THE HONORABLE THOMAS J. CURRY, COMPTROLLER OF THE 
      CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Curry. Chairman Hensarling, Ranking Member Waters, and 
members of the committee, thank you for the opportunity to 
testify today on the Volcker Rule.
    As you are aware, on December 10th, 2013, the OCC was one 
of five agencies that adopted a final rule to implement the 
requirements of Section 619 of the Dodd-Frank Act, known as the 
Volcker Rule. Consistent with the statute, the rule prohibits 
banking entities from engaging in proprietary trading and 
strictly limits their ability to invest in hedge funds or 
private equity funds.
    However, the rule does permit banks to continue engaging in 
important financial activities such as market making, 
underwriting, risk-mitigating, hedging, and trading in 
government obligations. The rule is designed to preserve market 
liquidity and allow banks to continue to provide important 
services for their clients while tailoring the compliance 
requirements to the size of the bank and the complexity of its 
activities.
    In developing the final rule, we carefully considered more 
than 18,000 comments. Commenters raised significant and complex 
issues. They also provided thoughtful, although sometimes 
conflicting recommendations. My written statement describes 
several of the changes that the agencies made to the final rule 
in response to these comments. For example, some of the changes 
were designed to clarify how banks can continue to use hedging 
activities to reduce specific risks. Other changes were made to 
narrow the scope of funds covered under the rule.
    While the statute applies to banks of all sizes, not all 
banks perform the activities that present the risks the statute 
sought to address. Throughout the rulemaking, the OCC worked to 
minimize the burden the rule would place on community banks. I 
am pleased that under the final rule, community banks which 
trade only in certain government obligations have no compliance 
requirements whatsoever. Moreover, community banks which engage 
in low-risk activities will be subject to minimal requirements.
    On an issue of particular importance to community banks and 
members of this committee, we also recently clarified that 
banks could continue to own collateralized debt obligations 
backed by trust preferred securities in a way that is 
consistent with the Collins Amendment to the Dodd-Frank Act.
    By contrast to expectations for community banks, the rule 
will require significant changes at large banks which engage in 
trading in covered fund activities. Most large institutions 
have been preparing for these changes since the statute became 
effective in July 2012 and have been shutting down 
impermissible proprietary trading operations. Now that the 
final rule has been released, large banks will need to bring 
their trading and covered fund activities into compliance 
during the conformance period, which runs through July 21, 
2015.
    Large banks will be subject to enhanced compliance 
requirements, which will include detailed policies, procedures, 
and governance processes. The CEOs of every bank subject to 
these enhanced compliance requirements must also provide annual 
attestations about their compliance programs. In addition, the 
largest trading bank will begin reporting on seven categories 
of metrics this summer.
    At the OCC, we are committed to maintaining a robust 
program to assess and enforce banks' compliance with the 
Volcker Rule. We are developing examination procedures and 
training to help our examiners assess whether banks are taking 
appropriate action to bring their trading activities and 
investments into conformance with the rule.
    I am mindful of the need to ensure that the agencies 
provide consistency in the application of the rule itself. For 
this reason, the OCC led the formation of an interagency 
working group to respond to and collaborate on key supervisory 
issues which arise under the rule. I am pleased to also report 
that the interagency group held its first meeting in late 
January and will continue to meet on a regular basis to discuss 
application and enforcement of the rule.
    Thank you again for the opportunity to appear before the 
committee today, and I am more than happy to answer your 
questions. Thank you.
    [The prepared statement of Comptroller Curry can be found 
on page 67 of the appendix.]
    Chairman Hensarling. Chairman Gruenberg, you are now 
recognized for 5 minutes.

   STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, CHAIRMAN, 
             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Chairman Hensarling, Ranking Member Waters, 
and members of the committee, I appreciate the opportunity to 
testify today on behalf of the FDIC on the regulations to 
implement Section 619 of the Dodd-Frank Act, also known as the 
Volcker Rule. Mr. Chairman, I realize this may be one of those 
occasions where everything may have already been said, but not 
everyone said it. So I will try to be brief.
    The purpose of the Volcker Rule is to limit certain risky 
activities of banking entities that are supported by the public 
safety net, whether through deposit insurance or access to the 
Federal Reserve's discount window. In general, the rule 
prohibits banking entities from engaging in proprietary trading 
activities and places limits on the ability of banking entities 
to invest in or have certain relationships with hedge funds and 
private equity funds.
    After extensive interagency deliberations and careful 
analysis of the 18,000 comments received in response to the 
proposed regulation, the FDIC, along with the other agencies 
represented here today, adopted the Volcker Rule last December. 
The final rule is consistent with the proposed rule and 
reflects changes made in response to the substantive comments 
received during the rulemaking process.
    The proprietary trading restrictions of the rule seek to 
balance the prudential restrictions of the Volcker Rule while 
preserving permissible underwriting, market-making, and risk-
mitigating hedging activities. The final rule also provides 
other exemptions from the proprietary trading prohibition, such 
as trading on behalf of a customer or in a fiduciary capacity.
    Perhaps the most challenging and complex of these 
exemptions has been the exemption for market-making activities. 
Under the final rule, the market-making exemption has been 
modified to reduce operational complexity and uncertainty for 
banking entities and at the same time to increase management 
accountability for ensuring that the requirements of the 
exemption are met.
    With respect to the risk-mitigating hedging exemption, the 
requirements of the exemption are generally designed to ensure 
that the banking entity's hedging activity is limited to risk 
mitigating hedging in purpose and effect. For instance, hedging 
activity must be designed to demonstrably reduce or 
significantly mitigate specific identifiable risks of 
individual or aggregated positions of the banking entity.
    The final rule also prohibits banking entities from owning 
and sponsoring hedge funds and private equity funds, referred 
to in the final rule as covered funds. Commenters frequently 
noted that including all commodity pools as covered funds, as 
originally proposed, would be overly inclusive. The agencies 
broadly accepted this suggestion from commenters, resulting in 
a final rule that focuses the definition of covered funds on 
those commodity pools which have characteristics that are more 
closely aligned to those of a hedge fund or private equity 
fund.
    Also in response to concerns raised by commenters, the 
final rule provides compliance requirements that vary based on 
the size of the banking entity and the amount of covered 
activities it conducts. For example, the final rule imposes no 
compliance burden on banking entities that do not engage in 
activities that are covered by the Volcker Rule.
    We also recognize, as has been noted, that clear and 
consistent application of the final rule across all banking 
entities will be extremely important. To help ensure this 
consistency, the five agencies have formed an interagency 
Volcker Rule Implementation Working Group. The group has begun 
meeting and will meet regularly to address reporting guidance 
and interpretation issues to facilitate compliance with the 
rule.
    Mr. Chairman, that concludes my statement, and I will be 
happy to respond to questions.
    [The prepared statement of Chairman Gruenberg can be found 
on page 80 of the appendix.]
    Chairman Hensarling. Thank you.
    And now, Chairman Wetjen, you are recognized for 5 minutes.

  STATEMENT OF THE HONORABLE MARK P. WETJEN, ACTING CHAIRMAN, 
              COMMODITY FUTURES TRADING COMMISSION

    Mr. Wetjen. Thank you, and good morning, Chairman 
Hensarling, Ranking Member Waters, and members of the 
committee. I am pleased to join my fellow regulators in 
testifying today.
    As this committee is well aware, the Commodity Futures 
Trading Commission was given significant rulemaking 
responsibilities through passage of the Dodd-Frank Act. The 
Commission has substantially met those responsibilities, with 
only a few rulemakings remaining. As a result, nearly 100 swap 
dealers have registered with the Commission. Counterparty 
credit risk has been reduced through the Commission's clearing 
mandate. And pre- and post-trade transparency in the swaps 
market exists where it did not before.
    In recent weeks, the Commission finalized the Volcker Rule, 
which was one of our last major rules under Dodd-Frank. The 
Commission's interest here, however, is relatively limited 
regarding the scope of and number of entities subject to its 
jurisdiction.
    I will now address some of the specific topics of interest 
that the committee identified before today's hearing.
    A notable hallmark of the Volcker Rulemaking effort was 
that the market regulators went beyond the congressional 
requirement to simply coordinate. In fact, the Commission's 
final rule includes the same substantive rule text adopted by 
the other agencies.
    Building a consensus among five different government 
agencies was no easy task, and the level of coordination on 
this complicated rulemaking was exceptional. More than 18,000 
comments addressing numerous aspects of the proposal were 
submitted to the rule-writing agencies. Commission staff hosted 
a public roundtable on the proposed rule and met with a number 
of commenters. Through weekly interagency meetings, along with 
more informal discussions, Commission and other agency staff 
carefully considered the comments in formulating the final 
rule.
    The agencies were responsive to the comments when 
appropriate, which led to several changes from the proposed 
Volcker Rule. I would like to highlight just a few.
    The final Volcker Rule included some alterations to certain 
parts of the hedging exemption requirements found in the 
proposal. For instance, the final rule requires banking 
entities to have controls in place to their compliance programs 
to demonstrate that hedges would likely be correlated with an 
underlying position. The final rule also requires ongoing 
recalibration of hedging positions in order for the entities to 
remain in compliance.
    Additionally, the final rule provides the hedging related 
to a trading desk's market-making activities is part of the 
trading desk's financial exposure, which can be managed 
separately from the risk-mitigating hedging exemption. Another 
modification to the proposal was to include under covered funds 
only those commodity pools that resemble, in terms of the type 
of offering and investor base, a typical hedge fund.
    With respect to the more recent interim final rule relating 
to TruPS, the Commission last month quickly and unanimously 
adopted it in an effort to assist community banks. This 
response was another example of the Commission responding 
promptly to compliance challenges presented to it and also 
demonstrated the enduring commitment of all the agencies here 
to ongoing coordination.
    Compliance with the Volcker Rule, including the reporting 
of key metrics, will provide the Commission important new 
information that will buttress its oversight of swap dealers 
and Futures Commission merchants, which are entities registered 
with the Commission that are subject to the rule.
    To ensure consistent, efficient implementation of the 
Volcker Rule, the agencies have established an implementation 
task force. One of the Commission's goals for this task force 
will be to avoid unnecessary compliance and enforcement efforts 
by the agency. Indeed, this goal is one of necessity for the 
Commission. Our agency remains resource constrained and cannot 
reasonably be expected to effectively police compliance to the 
fullest extent.
    To be effective, the Commission's oversight of these 
registrants requires technological tools and staff with 
expertise to analyze complex financial information. The 
Commission needs additional funding to deploy a basic 
nonduplicative oversight regime consistent with the rule. The 
Commission also is analyzing whether it can leverage the use of 
self-regulatory organizations, such as the National Futures 
Association, to assist with its responsibilities under the 
Volcker Rule.
    Additionally, I have directed the staff to examine whether 
new authorities are needed for the Commission to appropriately 
enforce the Volcker Rule. Because the rule was authorized under 
the Bank Holding Company Act, the Commission night need 
additional rulemaking in order to best respond to violations by 
swap dealers and FCMs. I will be glad to keep this committee 
informed about the results of that analysis.
    Regarding this committee's stated interest in the Volcker 
Rule's impact on market liquidity, it is important to note that 
the final rule closely follows the statutory mandate. In other 
words, the rule strikes an appropriate balance in prohibiting 
banking entities from engaging in the types of proprietary 
trading that Congress contemplated while protecting liquidity 
and risk management through legitimate market-making and 
hedging activities.
    Before and after the compliance dates for the Volcker Rule 
take effect next year, the Commission will continue its 
surveillance of the derivatives markets and monitor for any 
liquidity impacts brought by this rule or other causes as the 
swap market structure evolves.
    Thank you for inviting me today, and I would be happy to 
answer any questions.
    [The prepared statement of Acting Chairman Wetjen can be 
found on page 105 of the appendix.]
    Chairman Hensarling. I thank each of our panelists.
    The Chair now recognizes himself for 5 minutes.
    I want to start out doing something that I rarely do at 
these hearings, and that is to sympathize with the panel of 
regulators. How one goes about trying to reconcile permissible 
market making with impermissible proprietary trading quite 
easily could be the topic of the next ``Mission Impossible'' 
movie. So, I get that. But you did volunteer for the job.
    Looking at your testimony, Governor Tarullo, you said that 
trades could be either permissible or impermissible depending 
on the intent of the trade or the context and circumstances 
within which the trades are made. While the final rule issued 
by the agencies articulates standards for making those 
distinctions, those standards will be given meaning as they are 
applied by banking entities and supervisors in the field. 
Assuming you don't take issue with yourself, do any of the 
other panelists take issue with Governor Tarullo's statement?
    If not, I guess here is my question, or perhaps it is more 
of a comment. It seems to me that in many respects we still 
don't have a final rule, because it really depends upon the 
discretion of those in the field, particularly applying to 
one's intent. And I just want to say for the benefit of our 
committee, this isn't the rule of law, and this is one of the 
reasons that we will continue to have a chilling effect, I 
believe, on many corporate bond markets.
    Now, I know under the statute--and, again, the statute 
forces you to do many things that you may not otherwise feel 
are logical--exemptions are granted from the Volcker Rule, the 
Treasury Securities agency debt like Fannie and Freddie, and 
municipal securities as well. So we know that regrettably 
Detroit has gone belly up, and at least the last public 
proposal that I have seen offers creditors pennies on the 
dollar of their $11.5 million of unsecured debt. I woke up 
today and saw the headline in The Wall Street Journal, ``Puerto 
Rico Debt Cut to Junk Level.''
    And so, would anybody on the panel argue that our banks are 
safer and sounder or our financial system is more stable if our 
banks trade and hold Puerto Rican and Detroit debt as opposed 
to General Electric, Southwest Airlines, and Home Depot? And 
although I haven't checked the latest ratings, the last I 
looked, they were all AAA or AA. Does anyone wish to posit 
safety and soundness or greater stability?
    Seeing none, I would ask this question. Under Section 619 
of Dodd-Frank, we list a number of financial products which are 
exempt from the proprietary trading ban, but not included in 
that list are explicit exemptions for certain sovereign debt 
obligations. Now, you as a group have chosen to provide that. I 
assume that is done under Section 13, where I read, as long as 
it would ``promote and protect safety and soundness of the 
banking entity and the financial stability of the United 
States.''
    So Santander Bank, which is a U.S. bank holding company, is 
a wholly owned subsidiary of the Spanish Santander Group. They 
are going to be eligible under your rule. This isn't what 
Congress did.
    And by the way, just because Congress makes a mistake, that 
doesn't mean you have to make one.
    But now the U.S. bank holding company is going to be able 
to trade in Spanish debt currently rated Baa3 by Moody's, the 
lowest rating before junk status. Also included in your 
exemption is that the same bank can proprietarily trade in the 
debt of every political subdivision of Spain, including 
Valencia, which I believe is known more for its great paella 
than its great bond offerings. They are currently rated B1, 
which according to Moody's is junk status and ``should be 
judged as being speculative and a high credit risk.''
    So how can Santander Bank's ability to proprietarily trade 
in Spanish debt and the debt of Valencia, Spain, ``promote and 
protect the safety and soundness of Santander Bank and the 
financial stability of the United States?''
    Who would like to answer that? Governor Tarullo, would you 
like to answer the question?
    Mr. Tarullo. Just a couple of clarifying points. One, we do 
need to bear in mind that the prohibitions in the Volcker Rule 
with respect to trading, remember, are for short-term trading. 
The Volcker Rule does not determine what kind of instruments a 
depository institution or another affiliate within a bank 
holding company can or cannot hold.
    It was for that reason, by the way, I put in that point 
about capital at the end of my prepared remarks, because our 
rules, the rules, that is, of the FDIC, the OCC, and the Fed 
will require capital set-asides for any assets held by the 
financial institutions, and those capital set-asides, of 
course, are determined with respect to the relevant riskiness.
    Chairman Hensarling. Regrettably, I see my time is way 
expired, but you are still showing a bias in favor of Spanish 
debt over U.S. companies through your rule.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. Tarullo, on page 2 of your testimony, while still in 
the first paragraph, you said, also, of course, the London 
Whale episode allowed staff to test procedural and substantive 
requirements of the proposed rule against a real world example 
of what should not happen in banking organizations.
    The JPMorgan London Whale trade is a textbook example of 
how a hedge can actually be a proprietary trade. In the course 
of just a few months, JPMorgan lost more than $6 billion 
through complicated swaps transactions.
    Is it correct that the Volcker Rule would prevent these so-
called hedges in the future? Would you explain how the Volcker 
Rule attempts to prevent the next London Whale?
    Mr. Tarullo. Congresswoman Waters, I think there are two 
ways in which the rule would be responsive to what we saw 
transpire in the London Whale episode.
    The first is procedural; that is to say that one of the 
things that has been reported about the London Whale episode is 
that the risk management lines of authority and the relative 
amount of risk assessment and documentation of risk that were 
done were not in accord with what the Volcker Rule would 
require.
    Essentially, the Volcker Rule says if you have something 
which is supposed to be a hedge, you have to document that it 
is a hedge, and that documentation not only provides the 
regulators with the opportunity to oversee the implementation 
of the rule, it allows the risk management officials of the 
financial institution itself to have a better handle on the 
various trades that are taking place throughout the 
organization.
    So in that respect, I think there is a substantial 
confluence of interest of the regulators and the ultimately 
responsible risk managers of a firm.
    The second is the substance of the situation, where 
anything can be characterized as a hedge if you work hard 
enough at it. And what the rule is intended to do, and I think 
with the kinds of changes that some of my colleagues describe 
does a better job of doing than maybe the proposed rule did, is 
to make sure that trades that are supposed to be hedges on 
existing positions do not take on more risk that previously 
didn't exist. And that, in fact, of course is what happened 
with many of the trades involved in the London Whale.
    So the short answer is, on both procedural and substantive 
grounds, it would be responsive to that episode.
    Ms. Waters. Thank you very much.
    Mr. Gruenberg, compliance with the Volcker Rule will 
largely be judged by a bank's compliance with their own 
internal policies and procedures, which they will be permitted 
to devise. Yet we know from past experience that banks have 
sometimes not complied with their own internal policies. Just 
look at examples of money laundering, and robo signing of 
foreclosure documents.
    How can Congress ensure that the rule is being faithfully 
implemented by your agencies and banks, and that banks are 
being held to compliance with their own policies and 
procedures?
    Mr. Gruenberg. Congresswoman, I think compliance and 
enforcement of compliance in many ways is the central issue 
relating to implementation of the Volcker Rule. The Volcker 
Rule establishes some prohibitions, but the real key to it is 
going to be oversight, supervision, and enforcement of the 
compliance requirements.
    And as we know, the activities prohibited by Volcker are 
largely concentrated in the largest financial institutions, 
which is why the compliance requirements of the rule are very 
much focused on the larger institutions. And for those larger 
institutions, they will have detailed reporting and 
recordkeeping and a set of other requirements, including 
metrics reporting for their activities, so we will be able to 
monitor the operations of the companies across-the-board.
    But all of that is ultimately going to depend on vigorous 
oversight and supervision by the agencies as well. And I think 
that is why we have made a point of establishing this working 
group, and I think--and you can ask each of the people at the 
table here--the commitment to effective enforcement is really 
going to be the key to implementation here.
    Ms. Waters. Mr. Curry, once the Volcker Rule has been 
implemented and operational for 7 years, what demonstrable 
factors should Congress be able to look at in order to see that 
the rule is working as intended?
    Mr. Curry. I think we will find from our oversight and 
regular examination and supervision of the institutions whether 
in fact they have complied in terms of the compliance 
procedures they are monitoring and the effectiveness of their 
metrics that are required under the rule itself. We will also 
be taking advantage of the conformance period to test both the 
institution's procedures and our own internal examination 
procedures as we proceed with the rule.
    Ms. Waters. Thank you. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Chairman Garrett, for 5 minutes.
    Mr. Garrett. Sure. Thanks, Mr. Chairman.
    Chairman Gruenberg, good morning.
    So following up along the lines of the chairman here, as he 
has indicated, the Volcker preamble states that regulators have 
the ability to use safety and soundness authority to exempt 
certain foreign and sovereign debt. As he pointed out, there is 
certain debt, such as Greece and Spain, that is extremely 
risky, and about which we should be highly concerned. And one 
can make the case that by doing so, you are actually making 
some of these institutions less safe and less sound by allowing 
them to do this.
    On the other hand, when it comes to addressing the problems 
in the CLO market, the preamble also states that you could have 
used your safety and soundness authority to address the 
concerns that have been raised here, and if you don't, then 
banks will be forced to fire-sale some of their legacy CLO 
holdings. This could drive down the prices, it could hurt the 
markets, and it could hurt those banks and make them less safe 
and sound than they are right now.
    And this is not a hypothetical that I am saying here. I 
have with me a letter from the First Federal Savings Bank of 
Elizabethtown, Kentucky. They are a small bank, $850 million in 
assets, so they are not the real target of the Volcker Rule. 
The letter states that they are still recovering from the 
financial crisis, they have new management, and they finally 
got some income, around $3 million.
    However, the letter goes on to say, and this is important: 
``The application of the final rules could result in the severe 
erosion of our already thin tangible common equity that was so 
severely depleted during the credit crisis. It is hard to 
understand, as a management team that was able to take a 
financial institution through the darkest days of the financial 
crisis, why we should be presented with another existential 
threat based solely on an arbitrary and expansive 
interpretation of the final rule.''
    So why are you using the safety and soundness argument on 
the one hand to allow for Greek and Spanish debt, but in a case 
like here, a good little bank that is trying to come out from 
under water, you are now imposing an existential threat on them 
and potentially putting them out of business? And this was, of 
course, not the intention of Congress.
    Mr. Gruenberg. Congressman, I did receive the letter. We 
received the letter, I think all of the agencies did, from the 
institution.
    Mr. Garrett. Sure.
    Mr. Gruenberg. So I am familiar with it, but since it 
obviously affects an individual company, I won't respond to 
that specifically.
    Mr. Garrett. Sure.
    Mr. Gruenberg. But if I may just speak more generally, the 
issue of CLOs, collateralized loan obligations, has been 
raised, particularly since the final rule was issued. It is 
certainly an issue, fair to say, it is fair to say, that the 
agencies now will have the opportunity to review and consider.
    I guess I would just make a couple of points, if I may.
    Mr. Garrett. So if you can get back to me on how and when 
you think you can actually fix this, because obviously for 
these small banks right now, they can't wait the normal course 
of time which it took this body to come up with this rule. I 
don't know for this particular bank, but other banks in a 
couple of years could, while your working group works your way 
through it, be out of business and the people in that town 
could have one less bank.
    A working group has been established. I guess I would put 
this question to everyone on the panel. One of the things that 
I was looking for, which was not done, was a cost-benefit 
analysis, correct? And that is despite the fact it was pointed 
out to us that there was a law in place, the Riegle Community 
Development and Regulatory Improvement Act back in 1994, that 
requires Federal agencies including the Fed and the FDIC, when 
they are coming up with a new rule, to basically--and I won't 
read the whole thing here; I don't have that much time--assess 
the cost on institutions and also the benefits.
    So since that is the law in place, why was it that no one 
did a cost-benefit analysis?
    Mr. Tarullo. I wouldn't say, Congressman, that there was no 
cost-benefit analysis. I think what you actually saw--
    Mr. Garrett. I have not seen anyone who has said that there 
is. You say there is a cost-benefit analysis? Can you provide 
it to the committee?
    Mr. Tarullo. First off, we should start by remembering that 
the basic policy decision was made by the Congress. That is, 
the Congress decided that proprietary trading--
    Mr. Garrett. Now, look. I only have 46 seconds. A cost-
benefit analysis was not done, and it was a requirement. I 
would like an explanation in writing from each one of you on 
the panel as to why you did not comply with that.
    Also, I would like a commitment, since you have a working 
group here and you have indicated that you will be going 
forward, maybe I will just run down the row in the last 20 
seconds, will each of you commit, going forward through the 
working group, to develop an agreed-upon set of basis or 
metrics to determine the rule's impact on the ability of 
businesses to borrow in the corporate bond market, and also 
through this working group to continuously monitor those 
metrics and the impact of those rules, and then to also report 
back to us on a quarterly basis on your findings? That way, we 
would actually have specifics and timeframes.
    Let's run down. I will start on the left.
    Governor Tarullo?
    Mr. Tarullo. Congressman, I am not sure that sitting here--
I want to consult with our colleagues to see what kind of 
process we are going to follow. We are surely going to follow a 
process of trying to deal with interpretive difficulties. I do 
beg to differ a bit. I think--
    Chairman Hensarling. We need rapid answers. The time of the 
gentleman has expired. Rapid answers, please.
    Ms. White. I will say that I think that the working group 
is enormously important to look for and analyze unintended 
consequences and respond to them, which is the purpose of it. 
It is very actively engaged now, including considering what you 
mentioned--
    Mr. Garrett. Can you all commit to the timeframe and 
everything else that I laid out there, Mr. Chairman, from them? 
Maybe you can just ask them to run down, yes or no, make the 
commitment.
    Mr. Curry. We will also be looking at the, during the 
performance period, the impact of the metrics and other 
procedures that we are developing.
    Chairman Hensarling. Quickly, the last two gentlemen.
    Mr. Gruenberg. Yes. We will do the same as Comptroller 
Curry indicated.
    Mr. Wetjen. As will the CFTC.
    Mr. Tarullo. Mr. Chairman, could I just take 10 seconds for 
Congressman Garrett to say, whatever it is, whatever processes 
we do decide, we surely will report them back to you and try to 
give you a sense of how this oversight and implementation is 
taking place, which will then in turn allow you to ask more 
questions about it.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, the 
ranking member of our Capital Markets Subcommittee, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. I thank the chairman for yielding.
    The idea behind the Volcker Rule is a simple one: Banks 
that receive Federal deposit insurance should be serving their 
customers and not making risky bets for their own account. It 
took nearly 4 years for this simple idea to be translated into 
a final rule, and the majority of the work was done by the five 
regulators before us today, and I would simply like to say 
thank you.
    I would also like to point out that most of the banks 
across this country have already accepted the Volcker Rule. I 
did a survey of the banks that I am privileged to represent, 
and every single one of them is treating it like the law of the 
land. Every single one has spun off their proprietary trading 
desks.
    So the Volcker Rule, I would say, is here to stay. Instead 
of rehashing the same old debates, I believe we should be 
focused on getting the implementation right and making sure 
that the rule is tough but workable.
    So with that in mind, I would like to ask Governor Tarullo, 
I understand that the CLO industry has proposed a fix that some 
in the regulatory community may consider too broad, and I agree 
that we should be very careful about amending the Volcker Rule, 
because we don't want to blow up a huge hole in the rule. But I 
would like to ask you, do you think that there is some narrower 
fix that would solve their challenge, their problem, while also 
protecting the Volcker Rule?
    Mr. Tarullo. Congresswoman Maloney, that, I think, is the 
question that we will have to address. And in fact, I think 
someone already alluded to the fact that this issue was already 
at the top of the list of the group to think about. You have 
quite properly identified the challenge, which is to see 
whether there is a way to respond where, legitimately, the 
interests implicated by the Volcker Rule are not at issue 
without opening up a broader hole that does implicate those 
issues.
    I would just note in passing that an approach to this 
already appears to be in train among some market actors, which 
is to say, making sure that the CLOs, new CLOs which they are 
issuing do not contain other securities that cause the position 
to become a covered fund. Now, that doesn't deal with the 
legacy issue, and that is the one we will be addressing. But 
going forward, at least, there is a way which I think the 
industry itself has already identified.
    Mrs. Maloney. And how, Governor--or anyone else on the 
panel--are the agencies planning to share the trading data that 
they are going to collect to monitor compliance with the 
Volcker Rule? Will there be a centralized location for the 
trading data, such as the Office of Financial Research, or will 
each regulator examine the data that it collects separately?
    Ms. White. Maybe I could respond to that initially. Again, 
the working group for implementation has already begun to 
discuss that, and the feasibility of having a common site for 
the data, but the discussions are ongoing as we speak.
    Mrs. Maloney. Okay. You mentioned in your testimony earlier 
that the working group is clarifying different parts of the 
Volcker Rule now. But do you know yet how they are going to 
coordinate enforcement of the Volcker Rule? What if one agency 
thinks that a trade violates the Volcker Rule, but another 
agency thinks that it is acceptable? How are you going to solve 
that? Are you working on a memorandum of understanding on 
enforcement? But what happens if two regulators disagree on an 
action?
    Ms. White. Again, I think the consistency and enforcement 
is also very much under discussion by all the agencies, 
including in this working group. Each of the agencies would 
have the power to require divestiture or a bank to stop 
engaging in proprietary trading. Issues could be discovered 
upon exam by any of the agencies and discussed and coordinated 
among the agencies before a decision is made as to what to do 
enforcement-wise.
    Mrs. Maloney. What happens when there is a legitimate 
disagreement between them?
    Ms. White. The goal is obviously consistency, but there is 
a mechanism to discuss that, toward that objective.
    Mr. Tarullo. I would just add, Congresswoman, that in the 
bank regulatory area, the issue of an activity that affects 
different parts of a bank holding company arises quite 
frequently, and in fact the three banking agencies have a very 
well-established set of mechanisms for consulting. And I have 
to say it has struck me in my 5 years at the Fed that rarely 
does disagreement on that among staff come to my level. They 
are usually able to work it out. And I don't see any reason why 
that wouldn't be the case with the Volcker Rule as well.
    Mrs. Maloney. Thank you. My time has expired.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, Mrs. Capito, the Chair of our 
Financial Institutions Subcommittee, for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    I want to go to the issue that I talked about in my opening 
statement, which was the issue of the CDOs and the TruPS and 
how that ended up in the final rule, when the proposed rule did 
not really go into this area, and therefore, there was no 
comment period to see this unintended consequence.
    So if somebody could give me some clarity, why did you 
choose to put this into the final rule without allowing those 
most deeply affected, most particularly community banks, to 
have the opportunity to bring to light to you all and to others 
that this was going to have some negative impacts? Who wants to 
answer that?
    Mr. Tarullo. I can start, Congresswoman Capito.
    As I think you know, the issue with the TruPS arose from a 
confluence of several factors. One, of course, was the rule 
itself, and I think people understood that there was 
contemplation of divestiture, and that is why there was a 
conformance period created just exactly to avoid fire sales.
    The second, and here is where I think a lot of people 
probably didn't focus on it both outside and inside the 
regulatory agencies, was the combination of the fact that 
accounting rules require that where the instruments in question 
had lost value in the market, that there was essentially a 
bringing forward of the mark-to-market adjustment because of 
the fact that those instruments were declining in value. And 
that is, I think, the interaction that wasn't contemplated, and 
that was why in particular we all felt that a quick response 
was required.
    I think with a lot of the other instruments that people 
have talked about, as I indicated to Congresswoman Maloney, we 
will be going through those, but in many, if not most 
instances, a lot of the instruments in question are actually at 
or above the values where they were issued into the market, and 
so the accounting rules are not forcing the decision and the 
write-downs immediately.
    Mrs. Capito. Okay. Let me ask a question, then, of Chair 
White. Your agency oversees the Financial Accounting Standards 
Board (FASB). Is this something that came into your bailiwick 
as we were creating this new part of the rule moving into 
December, as we have heard?
    Ms. White. I think I would have two responses to that. One, 
I think in the proposing release, at least broadly, questions 
were asked around covered funds, what is included and whatnot, 
and there weren't specific comments that came back in on that 
issue. I think one of the things that we were focusing on when 
the issue did gel is to make certain that everyone understood 
what the accounting rules were for a subsequent event should 
the agencies then act as they ultimately did act. So, that is 
an issue. It is not new accounting, but it is something that we 
responded to as soon as it was obviously an issue.
    Mrs. Capito. Right. I think the troubling thing from my 
aspect is--and I mentioned this also--that the options, because 
of the tight timeframes, were really a lawsuit that I think the 
ABA put forth to try to stop this. And also, many of us, 
Republicans and Democrats, were being approached quickly during 
the Christmas season on how we are going to address this issue. 
And so while I say thank you for making those adjustments in 
January, it certainly would have been easier probably for 
everybody if it was avoided on the front end.
    The last comment I will make, and this goes to what Mrs. 
Maloney was talking about, is that I am sitting here listening 
and I must have heard at least 40 times ``interagency group.'' 
We have all been on committees before, and when you get into an 
interagency group or you get into a committee, we all look at 
each other and say, okay, who is going to decide here? Who is 
in charge? I have yet to hear really who is in charge.
    I know you work across agencies and everything, but I can 
see a scenario that could be a negative scenario such as, who 
is in charge? Nobody is in charge, so nobody makes a decision. 
Or you make a decision over one another and then all of a 
sudden there are three or four different decisions that have 
been made, and how are the institutions supposed to react in 
the best interests of their clients?
    So if anybody has a comment on that, I know it is a work in 
progress, but I am deeply concerned about that.
    Mr. Tarullo. There is a legitimate concern, as you all well 
know, whenever you have multiple actors having to agree on a 
single course of action. I think that, as I was alluding to 
earlier, this is actually the normal state of affairs for the 
three banking agencies, and the need to coordinate, which 
sometimes is in the face of some disagreements that then 
sometimes do hold things up and they have to go up for decision 
in that case.
    I would just say it is the other side of wanting multiple 
voices involved in any regulatory effort, which was clearly 
Congress' intent with respect to the Volcker Rule.
    Mrs. Capito. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Gruenberg, I would like to talk to you about the 
TruPS CDOs. As you heard, the final rule provided the financial 
industry with many exemptions, including new guidance on TruPS 
CDOs, which have community bankers very concerned. However, 
some in the industry are now asking for more lenient treatment 
regarding CLOs.
    Can you explain what risk nonexempt or arbitrage CLOs pose? 
And I would just like to ask you if it is wise at this point to 
make another exemption, given the fact that only 100 community 
banks out of 6,000 have CLOs?
    Mr. Gruenberg. As has been indicated, that is the issue we 
are going to have to consider. I think the things to think 
about are, one, in regard to the CLOs, if a CLO is made up 
exclusively of loans, and that would apply to a substantial 
number of them, they would not be considered a covered fund and 
therefore would not be subject to the Volcker Rule requirement.
    For the others, that is really what we need to sort 
through, and the industry refers to those as arbitrage CLOs, 
and they have, in addition to loans, other kinds of 
impermissible assets in the CLO. In many cases there are just a 
small number of assets, so they can be easily disposed of and, 
in a sense, the CLO can be cured from the standpoint of Volcker 
compliance. In other cases, the other assets may be a 
substantial portion of the CLO and create a greater challenge.
    I think what the agency has to consider is what, if any, 
change in treatment should be provided for them, and that is, I 
think, what we will need to focus on.
    Ms. Velazquez. So how would regulators have treated the 
underlying loans in arbitrage CLOs if banks had originated them 
and held them on their books?
    Mr. Gruenberg. You are talking about loans that are by 
definition leveraged loans that carry risk with them, if that 
is the underlying questions that you are raising.
    Ms. Velazquez. Mr. Chairman, again, industry participants 
have stated a fire sale of CLOs could cost them 90 cents on the 
dollar. I just would like to ask you if you know how they came 
up with this figure?
    Mr. Gruenberg. I couldn't say offhand where that came from.
    Ms. Velazquez. What did regulators do in the rule to 
prevent such a fire sale?
    Mr. Gruenberg. I think that is part of sorting through the 
issue, Congresswoman, both to examine the merits of the issue 
and any potential consequences of a response.
    Ms. Velazquez. Chair White, foreign markets have yet to 
implement regulations similar to the Volcker Rule. What is the 
likelihood that large U.S. banks will simply move their 
proprietary trading overseas?
    Ms. White. Obviously, the competitive effects of the 
Volcker Rule as enacted in the statute are not new to us. It is 
certainly one that we also attended to with respect to the rule 
itself. I would note that in Europe, the United Kingdom, 
France, and Germany, they are moving toward doing some kind of 
rules in this space, but they have yet to sort of land on and 
actually adopt those. So there is more to be said about that. 
Obviously, what you don't want is the regulatory arbitrage, you 
don't want the anticompetitive effects on the U.S. entities, 
but the statute also requires what it requires.
    Ms. Velazquez. So is there anything in the Volcker Rule 
that addresses the threat to the U.S. financial system by 
overseas proprietary trading?
    Ms. White. I think that was one of the changes I actually 
alluded to in my oral testimony with respect to proprietary 
trading of foreign banking entities, whether it was going to be 
anything solely out of the United States and was going to be 
completely out from under the Volcker Rule. We might have lost 
liquidity then, there might have been anticompetitive effects 
that occurred then, and so we refined the rule in light of 
those concerns.
    Ms. Velazquez. Thank you.
    Comptroller Curry, a recent OCC survey of financial 
executives indicates a greater willingness to lend to 
businesses and consumers. Is it possible that the Volcker Rule 
could further boost small business lending as banks seek out 
revenue in traditional financial products due to the general 
prohibition on risky and lucrative proprietary trading?
    Mr. Curry. We see that as a very positive sign that banks 
are increasing their willingness to lend, and hopefully that 
will translate into some economic benefit as well.
    Ms. Velazquez. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, the Chair of our Housing and Insurance 
Subcommittee, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I think this has been alluded to, 18,000 comments to a rule 
that was originally put out that a lot of people felt like was 
pretty vague when it was put out, and I think that is one of 
the reasons you received 18,000 comments on it. But we were, I 
think, many of us a little surprised it wasn't reproposed after 
the fact that there was so much interest in that. There was 
really not any chance then to review the changes, and there was 
no economic analysis involved and really no provisions to 
coordinate enforcement, examinations, and interpretations. I 
would think, and hopefully the panel agrees, that is probably 
not an ideal situation.
    But that being said, what procedures have been established 
to ensure that all of the impacted entities receive consistent 
and timely answers to interpretive questions that I am sure, as 
I am told, there are a lot of those coming in. I will just 
start with the panel, and who would like to tell us what you 
are doing?
    Mr. Curry. I would just emphasize what other panelists have 
said earlier, Congressman, that this is really going to be one 
of the major frameworks that we have to establish for our 
working group. I think the goal is to make sure that we have 
consistent interpretation. The working group, which will be 
composed of subject matter experts, will be the starting point 
for those discussions and ultimately the principals of the 
agency will make that call.
    Mr. Neugebauer. Ms. White?
    Ms. White. I really don't have much to add, so I don't want 
to take your time on that. I think we were all focused on, it 
is actually reflected in the adopting release, too, the 
importance of consistency as we proceed further, and 
responsiveness, and that we need to be very actively engaged, 
as that is the purpose of the working group. It is also the 
purpose of the commitment of all five agencies to do that.
    Mr. Neugebauer. Obviously, these interpretations are going 
to be a very important piece of the regulation, and so the 
question is, one, you are saying that this working group is 
going to coordinate that between the five of you. But the other 
question is, how will we disseminate it? Will that be a public 
process? In other words, once that finding is determined, and 
that interpretation is done, will those interpretations be made 
available for comment?
    Mr. Tarullo. That probably depends. My suspicion is, 
Congressman, without knowing now, that there will be some 
issues that arise that are susceptible to more or less 
generally applicable guidance, and that in that instance the 
same kind of processes that we follow in other supervisory 
areas, where you elaborate what you have been able to conclude 
and you send it out to supervisors and examiners and it is 
available to the firms, that would be the appropriate path to 
follow.
    There will probably be other instances, and I think in 
particular in terms of market-making decisions on whether for a 
particular kind of instrument the particular approach that a 
firm is taking is in fact legitimate market-making, where it 
might actually involve some proprietary information from the 
firm. It will be a very sort of firm-specific interpretation 
that, for example, the SEC may say to the rest of the group, 
this is what we are facing, this is where we are inclined, does 
everybody agree? And there may be a general agreement on that. 
But then you wouldn't want to publish that, because you don't 
want to publish the business strategy of a particular firm.
    So I think it probably varies depending on the general 
applicability and sort of nonfirm-information-revealing quality 
of the decisions.
    Mr. Neugebauer. And if that decision is challenged, for 
example, then does that challenge go back to the working group 
or does it go back to the individual entity? Then, how is that 
reconciled?
    Mr. Tarullo. Again, I am drawing here on our bank 
supervisory experience where--and I would expect you will have 
something similar to this in the Volcker Rule area--in the 
first instance there tends to be a dialogue with the immediate 
supervisors, and all of these big institutions that have to 
report the metrics have onsite teams of supervisors from some 
combination of the Fed, the FDIC, and the OCC. And then, of 
course, the SEC has a regular relationship with the big broker-
dealers.
    So that will be in the first instance. But as always 
happens when there is a disagreement or an objection or a 
desire to have the issue taken up in Washington at the 
particular agency, then that happens. And as I say, the norm is 
that these sort of things are actually worked out pretty 
effectively. It is one of the advantages of the supervisory 
process. There are exceptions, and that is when things get 
bumped up the line.
    Mr. Neugebauer. One quick question: If there is a 
difference of opinion in the working group, is there somebody, 
an individual agency who has the final word if the working 
group doesn't find a--
    Mr. Curry. It would be kicked up to the principals. We 
would be deciding any issue that the agencies couldn't resolve 
at the working group level.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me start with the Governor.
    Governor, I just want to follow up, I guess, on questions I 
heard Mrs. Capito ask, because everyone wants to know what the 
rules are and to have some certainty. But with the various 
regulating bodies, there could be some conflicting 
interpretations, making it confusing for many banks to 
determine which agency has the final say on what.
    Now that the rules have been adopted, would it make any 
sense for one regulator to take the lead in the interpretive 
guidance or at a minimum to have a process that ensures 
identical guidance is issued from all regulators?
    Mr. Tarullo. Congressman, I don't want to speak for the 
four colleagues to my left--but I think probably everybody 
would say that we all have a statutory mandate from the 
Congress for the oversight of the particular entities that we 
have, and under those circumstances you wouldn't formally cede 
an interpretive authority, because ultimately we, for example, 
would be responsible for the Volcker Rule at the State member 
banks, Mary Jo at the broker-dealers, and Tom at the national 
banks.
    But again, having said that, I think part of the reason why 
people are asking questions about how this works is precisely 
because it generally works so well--again, at least among the 
banking agencies, but we have more and more contacts with the 
market regulators--of working things through.
    And, just to remind everybody of something that was in 
Chair White's opening remarks, that the decision of the market 
regulators and of the banking regulators was not to go with our 
own rules, even though, as you know, the Volcker Rule is really 
a number of separate rules--the banking agencies, the broker-
dealers, the commodities dealers. But instead, everybody 
understood the importance of getting consistency in the 
regulation, notwithstanding the substantial additional time it 
took to get there. And I would say that commitment to getting a 
consistent regulatory framework will naturally extend to a 
commitment to getting a consistent interpretive framework.
    Mr. Meeks. Let me stay with you, Governor, because it has 
also been argued that prohibiting proprietary trading will hurt 
our banks as they compete overseas. The European Commission 
recently recommended a version of the Volcker Rule for its 
largest banks and the U.K. government has adopted a similar 
proposal that pushes risky trades into a separately capitalized 
ring-fenced entity. And my question to you is, how relevant are 
competitiveness concerns in the current environment?
    Mr. Tarullo. The tendencies you described have been very 
interesting to me. When the Volcker Rule was first passed by 
the Congress as part of Dodd-Frank back in 2010, I would say 
the immediate reaction that I got in talking to counterparts in 
other major financial jurisdictions was something along the 
lines of, it will be interesting to watch how you all do this; 
we are not likely to do anything. And yet in the intervening 
years, as you have just mentioned, more and more of the key 
jurisdictions have actually started to walk down that path to 
thinking about some combination of ring fencing, banning of 
proprietary trading.
    And I think that is based on experience, Congressman. I 
think people have had experiences with their own firms, I do 
think that the London Whale episode resonated around the world 
and not just within the United States. So although we don't 
know, as Chair White said, where this is going to end up, it is 
pretty notable that the trend in proposals has been to come 
closer to something that looks more like the Volcker Rule. And 
I will be honest with the committee, I would not have predicted 
that 3 years ago.
    Mr. Meeks. Thank you.
    Chair White, let me ask you this question. I understand 
that some industry stakeholders have expressed concerns 
regarding whether banks would have to divest of certain senior 
debt securities of CLOs because those securities contain the 
right to remove a manager for cause. Currently, the Volcker 
Rule only permits debt security holders to have the right to 
remove the manager in the event of a default or an acceleration 
event. Are your agencies considering whether these voting 
rights with regard to the CLO manager constitute an equity 
interest versus a creditor-protective right?
    Ms. White. That is precisely one of the issues that, again, 
the working group is discussing in connection with CLOs. The 
issue is obviously what is an ownership interest, and it is 
defined by the rule with certain factors, including the one you 
note. So that is an issue that has been teed up for the group 
and they are actively discussing it.
    Mr. Meeks. I can't do another question in 4 seconds.
    Chairman Hensarling. No, the gentleman can't.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I would like to address my first question to Mr. Gruenberg. 
One of the concerns that I have is during the crisis there was 
this activity that went on which put a lot of the investment 
banks into the big banks and allowed Lehman Brothers, for 
instance, to fail. But when you put the Bear Stearns of the 
world in some of these other banks, I think you made them 
bigger, I think you made the institution more risky, in my 
judgment anyway.
    And one of the concerns I have is when you do this, 
suddenly now you put this more risky activity into an 
institution that is insured by you and your agency, and you put 
those deposits, I believe, more at risk. So over the last 5 
years, I think some of them now are starting to spin off their 
proprietary activity, their trading activity, their investment 
banking activity. And I just wanted you to comment on that and 
how much of it has gone on, how much does it still need to do, 
and just your perspective.
    Mr. Gruenberg. I think that is an important question, 
Congressman. I think it is fair to say that the way we dealt 
during the crisis with some of the troubled institutions was to 
facilitate acquisitions by other institutions and consolidate 
them into bank holding companies. And I think the combination 
of those activities and the increased scale of the activities 
raised significant questions for regulation and supervision.
    I think it is one of the reasons we are so focused on the 
capital and liquidity rules that particularly apply to these 
large systemic companies, because of the risks they pose and 
the need to, frankly, impose higher prudential requirements on 
those large complex institutions that pose the greatest risk to 
the system and are, I think, differentiable from a lot of the 
other institutions in the system. So I think it is one of the 
significant challenges for prudential standards and for 
supervision going forward.
    Mr. Luetkemeyer. One of the concerns I have, obviously, is 
if it is an FDIC-insured institution, obviously that impacts 
the FDI insurance fund, so there is some risk there for that.
    But I am curious, how many banks that you are aware of just 
off the top of your head, rough figure, have divested 
themselves of these types of activities or put them into a 
subsidiary of some kind so they now no longer have the main 
institution, the retail portion of their business, that would 
be impacted by this activity?
    Mr. Gruenberg. I don't have those numbers available. I will 
be glad to check on that and get back to you.
    Mr. Luetkemeyer. Okay. Are there a lot of them that still 
have those activities in the bank, then?
    Mr. Gruenberg. I think most, but I want to check on the 
facts here. For those that have separate proprietary trading 
desks, I think as a result of the Volcker Rule, a lot of those 
have been taken out.
    Mr. Luetkemeyer. Right.
    Mr. Gruenberg. But I would want to really check on the 
facts for that.
    Mr. Luetkemeyer. I am not a big fan of the rule, but that 
seems to be one of the positives there, that they are starting 
to segregate themselves and set up these separate entities, 
which in my mind certainly protects the depository institutions 
a little bit better.
    Mr. Wetjen, you have been able to escape most of the 
questions here today, so I want to grab one for you. One of the 
things that happens, in my world anyway, is that a lot of folks 
I deal with begin the commodity process with their contract, 
when they take it out, is the first one and then it gets traded 
a dozen times after that. Have you seen with the Volcker Rule a 
chilling effect on folks being able to take out initial 
contracts for commodities?
    Mr. Wetjen. Congressman, I have not.
    Mr. Luetkemeyer. Have you seen a cost increase to those 
individuals or companies that take out the initial contracts to 
hedge their commodity, whatever it is, whether it is corn and 
beans or energy or whatever?
    Mr. Wetjen. I have not been aware of any such change as a 
result of the Volcker Rule. As I had mentioned in my oral 
statement, there have been a variety of reforms that our agency 
has put into place, and so consequently the market structure, 
in particularly for swaps, has changed, so there has been some 
attendant cost to the market structure changes in the swaps 
markets as a result of our reforms. I don't have any specific 
data on what the numbers would be, but I am not aware of 
anything specific in relation to Volcker.
    Mr. Luetkemeyer. The other members of the panel this 
morning, very quickly, I have less than 30 seconds left here, 
have you seen an increase in the cost of doing business as a 
result of the Volcker Rule at this point yet?
    Mr. Tarullo. No, sir.
    Mr. Luetkemeyer. No?
    Mr. Tarullo. No. But just to be fair, I think a lot of 
people are waiting for the final rule to come out before they 
start making--
    Mr. Luetkemeyer. The anticipation of the final rule here 
hasn't caused--
    Mr. Tarullo. There it is basically, what you mentioned, the 
prop trading has been divested.
    Mr. Luetkemeyer. Okay.
    Ms. White?
    Ms. White. I haven't seen the increase in cost, but clearly 
there are costs.
    Mr. Luetkemeyer. Okay.
    Mr. Curry?
    Mr. Curry. I would agree. And that is something we will be 
looking at during the conformance period.
    Mr. Luetkemeyer. Okay.
    Mr. Gruenberg? Okay. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. And thank you for 
having two members of the panel whose accents that I can 
understand. Actually, they don't have accents; all the rest of 
you have accents.
    Gentlemen, first of all, thank you for being here, and 
thank for your testimony. It is always amazing to me that in 
today's world, from what I see, is the most complex financial 
services industry in the history of mankind, not just in 
America, but across the world. We are in a globalized economy, 
we are all struggling to figure out what is going on, what is 
going to happen tomorrow. And I checked out all of your 
backgrounds. You are the smartest people in the world, you have 
the best education you can have, and I know you are struggling 
with it as well.
    Yet this morning, on the basis of one rule that we 
instituted with the intent of trying to limit some of the most 
risky, most complicated activity the financial services people 
were playing with, that many people think played a significant 
role in the collapse of 2008, we passed a law that said, please 
help us, not kill it, but to limit it, put it in perspective, 
yet this morning from what I have heard so far, and we are not 
even halfway through the hearing, the rule could be the cause 
of the next economic collapse, it is arbitrary, it is 
expansive, it is an existential threat to the economy, and 
worst of all, apparently you all pass rules and regulations and 
then don't give a damn what the impact will be.
    I think that each of you should be prepared, not from me, 
but at some point during this hearing, someone may as well just 
ask you, why do you hate America?
    I find this to be ridiculous. It is a complicated rule, of 
which, as we move forward, I have had some communications with 
some of you, I am currently in discussions with some of my 
constituents who have some issues with some of the details, 
community banks being one of them. My hope and expectation is 
that you will work with us as best you can to address these 
issues as they go forward, as we find them to be real.
    I hope that each of you see that your role as a regulator 
is not just to regulate. I hope and presume that you see as 
part of your role a responsibility to inform us when you think 
we are wrong or when you think we have made a mistake.
    So I would like to ask each of you, if you could, if I made 
you emperor of the world, would you repeal Section 618, 619, 
yes or no? Simple item.
    Mr. Tarullo, would you repeal it?
    Mr. Tarullo. No, sir. And I think, as many people have 
observed, the London Whale showed why.
    Mr. Capuano. Ms. White?
    Ms. White. I would not. And I would just like to add that I 
think all of the regulators very carefully focused in the 
rulemaking on the market impacts, economic impacts, and 
responded to them and will continue to do so.
    Mr. Capuano. I have always believed that. Even when there 
were regulators that I didn't agree with, I have always thought 
that regulators, like most Members of Congress, are good people 
trying to make the world a better place.
    Mr. Curry, would you repeal it?
    Mr. Curry. I would agree with Governor Tarullo for the same 
reasons. JPMorgan is a national bank. We supervise it. That was 
an eye opener.
    Mr. Capuano. Mr. Gruenberg, would you repeal it?
    Mr. Gruenberg. No.
    Mr. Capuano. Mr. Wetjen, would you repeal it?
    Mr. Wetjen. No, I would not.
    Mr. Capuano. As we go forward, I would like to ask a few 
questions. First of all, I do think that there is a problem 
having so many regulatory bodies participating in one rule. 
That is why I have always been in favor of trying to 
consolidate. Not that I don't like each of you individually, 
but I do think that it is ridiculous that we have so many 
regulators doing the same thing. Consolidation, to me, we have 
had this debate a long time, I hope we actually make some 
progress at some point, and each of you will be winners, don't 
worry, we will figure out how. I don't know how.
    That is a different issue. I hope that as you go forward, I 
would strongly--I think it is part of your responsibility, I 
shouldn't even have to ask, but I am going to do it for the 
record--as you find things that you think that we should amend, 
let us know, because I agree, I don't want it repealed. I am 
more than open to amending it if you think that somehow we 
missed a comma or we have to tweak it or you think that you are 
constrained from doing what you think is right. I think that is 
a perfectly appropriate thing for you to tell us, even if there 
are disagreements amongst you, and I certainly hope that you 
will.
    This is a complicated area. You are on new ground. I don't 
expect you to get it 100 percent right the first time. I know 
you are trying. That is why it has taken so long. Some people 
wanted you to rush it and get it done, which I think would have 
been a recipe for absolute disaster. You took your time. You 
are trying to do it right.
    As you move forward, hopefully you will work with us to try 
to amend things that maybe you didn't see. I know you will be 
looking at the impacts of all the rules that you have. And I 
look forward to working with you as we move forward to get it 
right, to maintain the American financial services industry as 
the leading in the world, as we are today and we will be 
tomorrow. And I know that is what you want as well as what we 
want. Thank you all very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, the Chair of the House Foreign Affairs Committee, for 5 
minutes.
    Mr. Royce. Thank you very much, Mr. Chairman.
    During last month's hearing on the Volcker Rule, I 
questioned our panel on the need for coordination of 
examination and supervision and enforcement between the five 
agencies that are represented here today, along with the 
National Futures Association and FINRA. And I don't think their 
answers would surprise you, and I think you have heard more of 
that here today, some of those quotes.
    The rule in no way states how the regulators are going to 
coordinate. In fact, it acknowledges that there is not a method 
or protocol for doing that, and acknowledges that there is 
overlap in jurisdiction. So I think it is very lacking in that 
respect. That is one observation we heard. Another is, we don't 
think you can have five sheets of music, because if the rules 
are interpreted differently, I think that is a real problem.
    So the first question would go to the concern here on why 
there wasn't a coordinated implementation and enforcement plan 
developed before the rule was issued. But to build beyond that, 
I think setting up a working group and extending the 
conformance period clearly does not solve the coordination 
concerns, for this reason.
    As SEC Commissioner Gallagher pointed out, there is a clear 
difference between banking regulators and rule-based market 
regulators like the SEC and the CFTC. As he said, prudential 
regulators, such as the banking agencies, can indeed employ 
their discretion in seeking to obtain their desired regulatory 
outcomes. Their prudential regulation and statutory 
confidentiality protections, not to mention their embedded 
staff's constant interaction with regulated entities, allows 
them to bend their rules when they go too far. Those are his 
words.
    The Commissioner's rules-based regulatory regime, however, 
contains no such wiggle room. Our rules, as Mr. Gallagher says, 
are rules, and when our examiners come across a rule violation, 
whether egregious and intentional or peripheral and accidental, 
they are required to record such violations.
    So without some further clarification, regardless of the 
time you have to work on this, isn't this conflict in 
regulatory model going to become an issue? And let's come 
around to why that wasn't originally coordinated in terms of 
the implementation and enforcement plan developed before this 
rule was issued. Because I see this as part of an ongoing 
problem, and I would love to hear your response to this and how 
we are going to address it.
    Ms. White. That is a very good question.
    Mr. Royce. Besides you are going to say you have a working 
rule.
    Ms. White. No. Understood, understood. I think you are 
absolutely correct. At the end of the day, we have independent 
agencies with independent responsibilities. I think there is an 
acute awareness, you are hearing it today from, I think, all 
the panelists about the need not only to coordinate and reach 
consistency on interpretive guidance, but also on compliance 
and enforcement.
    And it is true that--I will let Governor Tarullo or the 
banking regulators speak to what they do in the way of 
supervisory authority and responding to instances of 
violation--but clearly our examiners, if they find a violation, 
will record it. That doesn't tell you precisely what the 
response after that will be. Is it a referral to the 
enforcement side? Is it guidance back to the firm in question?
    Mr. Royce. It is very complicated for me to understand. If 
that happens, you have one agency that says it is market making 
and you have another agency that says, no, it is proprietary 
trading. It would seem to me that you would want to work this 
out, because uncertainty in this is going to lead to real 
problems.
    Ms. White. No question.
    Mr. Royce. Yes.
    Mr. Curry. Congressman, we are committed to having 
interpretive consistency. I think the issue is we each regulate 
separate entities, legal entities. I am the supervisor of 
national banks and Federal savings banks. If an activity is 
being conducted in the bank, then we will exercise our legal 
authorities and take appropriate action that will either 
correct or, if necessary, enforce those provisions. We have a 
wide variety of tools that we can employ.
    But in terms of how the regulation should be applied, I 
think we can, and this working group is the vehicle for us 
sorting out what the proper interpretation is. And then 
ultimately, as Chair White said, we have to do what our 
independent agencies are required to do.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    I want to start out by thanking all of you for your work 
individually and also as a working group. I understand there 
have been 18,000 comment letters sent in. I think you took a 
fair amount of time, several years, in trying to work this out 
yourself and others, and I think you have come out with a good 
result. I think that we understand why all of the Wall Street 
banks are against this prohibition of proprietary trading, 
because it is a very lucrative business, made even more 
lucrative by the fact that it is subsidized by taxpayer 
funding.
    So when we originally started this discussion, a lot of 
fear, or at least a weakness that was pointed to repeatedly was 
the fact that U.S. banks, because of the Volcker Rule, were 
going to be less competitive with foreign counterparts. And as 
Governor Tarullo has pointed out, now it looks like the EU is 
moving in our direction, or in the direction of the Volcker 
Rule that you have carved out. Both the EU and the Vickers 
report as well seems to be pushing in that direction. And so 
there are less and less complaints about us being less 
competitive and there is more indication that the rest of the 
world is moving with us in a good direction.
    What I would like to know is, this is so complex and we 
have so many exemptions for hedging and market making, what do 
you see, as a group and individually, as the threats to 
undermining the Volcker Rule? What do you see as the greatest 
danger to either, like I say, undermining the prohibition on 
proprietary trading, or where do you see the areas in the 
Volcker Rule that need reinforcement more immediately?
    Ms. White. On the market-making exemption, that's one that 
we obviously wrestled with very, very carefully in order to 
make certain that we were both being true to the statutory 
prohibition against proprietary trading but also true to the 
exemption so that the markets could continue to work with the 
depth and liquidity they need to. That is an area I think, on 
both sides, one will want to closely focus on, both in terms of 
possible evasion, but also are there more unintended impacts we 
are having that we didn't intend to have on legitimate market-
making?
    Mr. Lynch. Great.
    Mr. Gruenberg. Congressman?
    Mr. Lynch. Sure.
    Mr. Gruenberg. I would come back to the importance of 
compliance and enforcement here. I think that is really going 
to be the key both to the effectiveness and the credibility of 
the Volcker Rule. It is a challenging supervisory task to 
distinguish legitimate market-making and hedging activities 
from proprietary trading. And the thoughtful and effective 
implementation of the compliance requirements to monitor that 
activity, so that it becomes a routine part of the operations 
of the firms overseen by their responsible regulators, really I 
think is going to be the key challenge here. If we can do that, 
we should preserve the legitimate activities for the firms and 
for the markets. And reduce the risks particularly for these 
large systemic companies. And I think that would be a 
meaningful achievement.
    Mr. Lynch. Thank you.
    I know that most of the oversight agencies, at least Mr. 
Tarullo, Mr. Gruenberg, and Mr. Curry, are self-funded.
    Chair White, is your ability to strengthen those areas 
threatened by the lack of funding for the SEC?
    Ms. White. The lack of adequate funding is a significant 
concern at the SEC. We have vast responsibilities, quite apart 
from Dodd-Frank and the Volcker Rule and even quite apart from 
the JOBS Act, that under current funding levels, we don't have 
enough in my judgment to responsibly do what we should be doing 
for our markets and for investors.
    Mr. Lynch. I agree. Thank you.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, the Chair of our Oversight and Investigations 
Subcommittee, for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman.
    In previous hearings, I have asked who the lead regulator 
is when it comes to Volcker, and I just figured it out today.
    Governor Tarullo, it is you and it is the Federal Reserve, 
just based on the answering of questions, the willingness to 
step in, and the deference that others on the panel give to 
you. I guess when you have five big regulators, independent 
regulators sitting on the same panel, there ends up being an 
alpha dog.
    And, Governor Tarullo, today that is you.
    The other takeaway I have from this hearing is that we 
still don't know the costs or exactly what this rule will do. 
That is kind of clear after listening to everyone's testimony 
and the questions we have today and--or the negative impacts 
that this rule is going to have on the market.
    But, in particular, Chair White, I want to ask you about 
rigorous cost-benefit analysis. Now, you had dissenting 
opinions within your Commission, saying that there was not a 
rigorous cost-benefit analysis performed. What say you?
    Ms. White. I say that we basically, I think all the 
regulators did--
    Mr. McHenry. I am just asking about you.
    Ms. White. All right. Just us. We thoroughly addressed the 
economic considerations related to the Volcker Rule. The 
proposal teed up specific questions to elicit alternatives, 
costs, and impact information. I know our economists at the SEC 
were very much involved in that. And then I think I have listed 
several other important ones where we responded as a result of 
that economic analysis and to the comments that raised those 
economic impacts.
    Mr. McHenry. So where could I see this rigorous cost-
benefit analysis?
    Ms. White. I think you will see it if you look throughout 
the adopting release to how we addressed the comments that 
raised those economic issues.
    Mr. McHenry. Do you have specific page numbers or a section 
that I could reference?
    Ms. White. I could give you some, either provide them to 
you after this or give you some now on some of the issues that 
I have already mentioned. I am happy to provide it.
    Mr. McHenry. In your predecessor's term as Chair of the 
SEC, I asked Mary Schapiro about this. She codified as a matter 
of policy with the Securities and Exchange Commission a memo in 
the summer of 2012 on cost-benefit analysis. Did you adhere to 
the principles of that memo?
    Ms. White. The guidance wasn't specific. The framework of 
the guidance wasn't specifically applied to the adopting 
release. This was an adoption. We were authorized under the 
Bank Holding Company Act, and all the agencies proceeded in 
that manner. I think the reality of the joint rulemaking was 
that no one agency-specific individualized procedures were 
applied to it. We were all bound under the Administrative 
Procedure Act (APA) and complied with that, which included the 
economic considerations.
    Mr. McHenry. Your predecessor bound your agency to adhere 
to the memo and the principles within that memo on cost-benefit 
analysis. I will follow up with you on this.
    Ms. White. And I am very committed to that guidance as 
well.
    Mr. McHenry. This is the biggest rulemaking you will 
undertake probably in your tenure, probably in my tenure in 
Congress. And that is why I think it is important whether or 
not you adhered to that principle.
    Commissioner Gallagher in his dissent spoke of a fatal flaw 
in this rule and asked for a 2- to 3-week delay and re-
proposal. And he also says that it is riddled with problems. 
Obviously, you disagree. Would you speak to that?
    Ms. White. Ultimately, I know two of our Commissioners and 
I independently considered the issue of whether a re-proposal 
made sense or was required. I also took counsel on the legal 
issue from our General Counsel. It was not required. And my 
ultimate judgment was that it also would not be wise to do a 
re-proposal. I think, again, we have had a lot of folks comment 
both on the panel and among the members about the 2-year period 
of conformance during a number of engagements, and both by 
comment letters and meetings that we had. There was also 
persisting market uncertainty that obviously a further delay 
would have perpetuated that. So ultimately, I judged that was 
not either required or the right course to take.
    Mr. McHenry. I have a final question. It is really just a 
yes-or-no question. Governor Tarullo, Chairman Gruenberg, are 
you all prepared through a joint process to rule on the second 
round of living wills as being insufficient? Are you all 
prepared to do that?
    Mr. Tarullo. We are right now engaged, the two agencies are 
right now engaged in the discussion and the evaluation of the 
resolution plans that have come in and what next steps to take. 
And so, we surely are moving forward.
    Mr. Gruenberg. I think the answer is yes, Congressman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Connecticut, Mr. Himes, for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    And thank you all for being here and testifying and for 
your very hard work on this complicated regulation. This was 
not an easy assignment that came out of Dodd-Frank, but it was 
an important one. And I can't help but observe that my friends 
on the other side of the aisle with their relentless barrage of 
criticism on your efforts and on the concept behind the Volcker 
Rule offer, as usual, no alternative. And therefore, we are 
left to conclude that they believe that federally-assisted 
institutions with access to FDIC insurance and the reserve 
window and other forms of taxpayer subsidies should, in fact, 
be permitted to take proprietary bets to bet in such a way that 
they might be in the future required to turn to the taxpayers 
for support. I think that is an unfortunate point of view.
    I do think, however, that they and others raise very 
significant concerns about the complexity here. And one thing I 
wanted to make an argument for in acknowledging, I think, the 
very constructive side of your setting up this interagency 
working group, I would ask that you consider very seriously 
creating a formal process within that interagency group for 
banks to obtain interpretive guidance on questions that they 
will certainly have. I would further suggest that for clarity 
and to avoid some of the concerns that have been expressed here 
today, that you formally establish a timeframe--it could be 2 
to 3 months, whatever was appropriate--in which a bank or other 
entity could get a clear response from this group.
    I don't have a question here other than perhaps to ask 
whether this, in your estimations, or whether the interagency 
group would, in fact, have that as a function and whether you 
think it can provide timely interpretive guidance to banks with 
questions?
    Mr. Tarullo. Without regard, Congressman, as to whether a 
formal process with deadlines ought to be established, what 
lies behind your question I think everybody here would agree 
with, that we need to have a process of getting consistent 
interpretations out. Again my expectation would be, but this is 
admittedly based on the experience with three banking agencies, 
that an iterative process will be really helpful in a lot of 
instances where an institution can say, look, this is the kind 
of issue we are facing. What do you guys--meaning the 
interagency group--think? I think everybody here would say if 
it turns out that something more formal is warranted, then we 
will certainly think about it. I would certainly think about 
it.
    Mr. Himes. I certainly appreciate the work that you did and 
the speed with which you did it on the trust preferred issue 
that perhaps could have been avoided to begin with. But the 
speed with which you acted I think was important and hopefully 
serves as a model. And again, I would just really urge that 
this interaction group has as part of its mandate a formal 
process for interpretive guidance.
    Just shifting gears here, I share the chairman's concern 
and Chairman Garrett's concern about the exemptions for 
sovereign and municipal debt. I think they did a pretty good 
job of explaining that those two instruments can operate on 
both extremes of the credit spectrum. My understanding is that 
the rule itself provides no special ability for the regulators 
to necessarily control the credit quality of those instruments 
which may be subject to this exemption. So my question is, 
apart from the ordinary course of business, safety and 
soundness, regulators who will presumably be overseeing the 
balance sheet of these institutions, is there anything within 
the Volcker Rule context that can give us comfort that you will 
be vigilant on perhaps lower credit quality, sovereign or muni 
debt that could take advantage of the exemptions?
    Mr. Tarullo. I would note again that ultimately the Volcker 
Rule is about proprietary trading; it is not about the credit 
quality of any particular asset. It doesn't go to the issue--I 
think as many people have pointed out, there may be some assets 
that are high credit quality, at least as issued. And, by the 
same token, there may be some that are not, but as long as they 
are not held in the trading book and they are not traded, then 
they just require a capital charge against them.
    Mr. Himes. I do understand that.
    Mr. Tarullo. That is the core point, Congressman.
    The other thing just, again, to note, the exemption, of 
course, for U.S. Treasuries and municipals is something that 
was in the statute. The limited exemption that was provided in 
the final rule is taking into account the fact that a bank 
which is from a particular home country, like a U.S. bank with 
its relationship with U.S. Treasuries, is likely to have a 
particularly special role for the sovereign debt of its home 
country. And that was really the genesis of that.
    Mr. Himes. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate it, and 
I do appreciate your time being here. And I know my colleague, 
Mr. Meeks, on the other side touched on this a little bit, but 
I would like to explore our international competitiveness, and 
I can't help but note that we are the only advanced economy 
that has adopted this prohibition on proprietary trading. And I 
am concerned that, therefore, we are creating significant 
competitive disadvantage.
    It is my understanding, Chair White, that you had talked a 
little bit about this in response.
    But to my other colleague, it was just bringing up sort of 
the absence of a solution. It is kind of like saying I am going 
to punish my oldest son for the boneheaded move of one of his 
friends that got his friend into trouble, but my son has been 
living by the rules and hasn't had any problems. So, the logic 
of saying, if we are not going to come up and replace this 
Volcker Rule with another rule, somehow we condone bad behavior 
by somebody else is ridiculous on its face.
    But please explore with me a little bit of how in the world 
this does not put us at a tremendous competitive advantage. 
Through the contacts I have in Europe--and I worked through the 
TLD and a number of other organizations, I have relationships 
over there in London and Germany and other places--the 
indications that I have had is that they are not going to be 
adopting a Volcker-like rule at this point. I have extensive 
connections in Canada as well. They are telling me the same 
thing. In fact, they are all saying, hey, we will take the 
business because you guys are now making it more difficult. So 
please, somebody help me with this.
    Mr. Tarullo. Congressman, I can go back and say that it is 
the case that as of now, nobody has adopted something that 
looks like a version of the Volcker Rule. But, as I earlier 
indicated, what has been I think worthy of remark is that 
immediately after the adoption of the Volcker Rule in the 
United States as part of Dodd-Frank, there was essentially no 
interest in the concept in other major financial centers. And 
in the intervening few years, what we have seen is not just, as 
in the case of the European Commission's proposal, something 
that looks very much like Volcker, but we have seen in other 
countries things that are variants on ring fencing within 
institutions, variants on different capital requirements for 
different kinds of activities, some of which would go beyond 
what we have in the United States.
    Mr. Huizenga. So you are willing to wait until they put 
something in place to keep us at a competitive disadvantage. Do 
you acknowledge that we are at a competitive disadvantage?
    Mr. Tarullo. Congressman, whenever one prohibits a firm or 
a set of firms from doing anything, there is at least going to 
be some change in the ground on which they compete.
    I think the question of the magnitude of that is a pretty 
important one, and this gets back to Chair White's point about 
how market making, for example, which is a vital service that 
large broker-dealers play, is something that I think everybody 
on this panel wants to see preserved. And that is why, as I 
said earlier, the implementation that takes account of the 
variations and the characteristics of instruments that will put 
it in the markets is important.
    Mr. Huizenga. Let's let Chair White address that, then, 
quickly.
    Ms. White. Just very quickly, I think that the statute 
has--obviously mandates that this rule carries out. We were 
very sensitive within those parameters of the statutory 
mandates to competitive effects. I think I gave a couple of 
examples of that. But in terms of the magnitude of the effects, 
I think that is something you have to look at, going forward.
    Mr. Huizenga. Okay. That was close to being a congressional 
answer, in that you gave no answer. But--maybe let's do this. 
Show of hands, who here is satisfied with putting the rule in 
place knowing that it will put us at some sort of competitive 
disadvantage for whatever period of time until the rest of the 
world catches up? Are you all comfortable with that? Are you 
all uncomfortable with that?
    Mr. Tarullo. Congressman, I think I am comfortable with 
where we are here. But, again, let's not lose sight of the 
reasons why countries put financial regulations in, in the 
first place.
    Mr. Huizenga. We are not talking about why we have 
financial regulations. We are talking about this particular 
financial regulation, one that puts us at a competitive 
disadvantage, when there hasn't been a problem with it here in 
the United States. I heard that someone brought up the London 
Whale. All right. That is a completely separate issue from what 
we are dealing with here in the United States. So we are not 
saying that it is either the Volcker Rule or we are not going 
to have any rules, and it is going to be the Wild, Wild West. 
The question is, is the Volcker Rule actually going to put us 
at a competitive disadvantage with the rest of the world? Does 
anybody want to use the last 5 seconds?
    Mr. Curry. It is possible. But we need to see what the full 
impact of the rule is and we will need to see what other 
jurisdictions do to compare what the competitive impact will be 
or will not be.
    Mr. Huizenga. Mr. Chairman, if you will indulge me, I will 
be sending a letter to each one of you asking how long you are 
willing to wait. Is it 6 months? Is it a year? Is it 3 years? 
What period of time do you need for that information? Thank 
you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Carney, for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman.
    Thank you for the opportunity to ask some questions. And I 
want to thank all the panelists and associate myself with the 
remarks, those that I understood, of the gentleman from 
Massachusetts, Mr. Capuano, in praising the panel for your 
expertise, your hard work, and your difficult job that you 
have.
    I was not here when Dodd-Frank passed. I came in 2011. So I 
think it would be helpful for me to take a step back, maybe 
back to the 10,000-foot level. Kind of where you were with Mr. 
Hultgren's question and just ask why you think the Volcker Rule 
is important in the framework of things that were put in effect 
by Dodd-Frank?
    Governor Tarullo, why don't we start with you. You 
mentioned capital requirements in your opening statement. Could 
you pull it all together and tell us why you think Volcker is 
important in that framework?
    Mr. Tarullo. Sure. As I think probably many people have 
heard me say--more than they wanted to hear--to me, the two key 
parts of post-crisis financial reform are: first, higher, 
better calibrated capital requirements; and second, addressing 
the risks, the run risks associated with the short-term 
wholesale funding market. Whatever one's views of the group of 
factors that contributed to the crisis itself, there is no 
question but that run on short term--runs on short-term 
wholesale funding was the precipitating event. That is what we 
saw with Bear, that is what we saw with Lehman, that is what we 
saw with AIG. So those to my mind are the two key elements of a 
post-crisis macro prudentially oriented regulatory system. I 
think where Volcker fits in is trying to push a bit at the too-
big-to-fail problem and more generally with the moral hazard 
issue of effective taxpayer subsidization of certain 
activities, which did not seem to the drafters of the rule 
necessary or appropriate for the financial intermediaries who 
operate with the benefit of FDIC insurance or potential access 
to Fed discount window or relationships with their affiliates 
that have similar advantages.
    So what I think it tries do is to carve off one kind of 
activity that does seem particularly related to moral hazard on 
the one hand and, on the other hand, isn't something that the 
drafters would feel is necessary to a full-service financial 
intermediary.
    Mr. Carney. Thank you.
    Chair White, Comptroller Curry, would either of you like to 
add anything, particularly as it relates to your particular 
responsibilities?
    Ms. White. In terms of the Volcker Rule, I think Congress 
made the judgments that Governor Tarullo is essentially talking 
about to try to promote financial stability and to also make it 
at least more certain or more likely that the taxpayers are not 
on the hook for future distress events.
    I think, as a regulator, our primary responsibility is to 
carry out those mandates with due regard for impacts on 
legitimate market activities and any impacts on the smooth 
functioning of our financial markets. And we have tried to do 
that in this rule.
    Mr. Carney. Comptroller Curry, do you have anything to add?
    Mr. Curry. I would essentially agree with Governor Tarullo 
and Chair White. I would add that as the prudential supervisor 
of the large national banks, I think our focus going forward is 
really to make sure--
    Mr. Carney. Most of this activity comes under your purview, 
correct?
    Mr. Curry. Between Chair White and my office.
    Mr. Carney. Broker-dealers?
    Mr. Curry. Right. So our focus now is really to take the 
rule as written and to have appropriate on-the-ground oversight 
of those activities.
    Mr. Tarullo. Congressman Carney, if you could remind 
Congressman McHenry of what you just heard, I would appreciate 
it.
    Mr. Carney. I would be happy to do that.
    I only have a minute left. Chairman Gruenberg, I would like 
to go back to Mr. Luetkemeyer's observation with you about the 
fund and the mergers that were kind of pushed.
    I just finished reading Chairman Bair's book, and she would 
argue, I think, that those mergers saved the fund money. Do you 
have a comment on that and her perspective? I don't know if you 
have read her book or not.
    Mr. Gruenberg. The mergers in the short run were part of a 
strategy to stabilize the system during the crisis. I think 
from that perspective, they were effective. But they did leave 
us with a set of institutions that are both large and complex 
and diversified that pose significant risks to the financial 
system.
    And that really comes back to one of the reasons for the 
Volcker Rule. The proprietary trading that is the focus of the 
rule is concentrated in these large diversified companies with 
insured depositories. Pushing that activity out so it doesn't 
benefit from the safety net is really what the rule is about.
    Chairman Hensarling. The time of the--
    Mr. Carney. I just want to thank all of you again for your 
great work.
    Chairman Hensarling. --gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    I think we have had some good discussion today about the 
risks and the challenges that the industry faces with possible 
conflicts in interpretation, possible competing of interest 
between the five groups. I want to talk about that a little 
bit. I want to try to get a specific example. I have worked 
hard on trying to come up with the perfect example. The best 
could I do so far is imagine a situation where we have a large 
broker-dealer that also happens to be a bank and it is trading 
an interest rate swap in its banking subsidiary. I think that 
covers everybody, and I am pretty sure if I can add the proper 
counterparties, I could make sure that everybody has some say 
in that particular trade. So here is my question: We have this 
entity. It is today. It is February of 2014. The rule comes in 
place in summer. And they come to you today, and they say, 
``Look, we would like to set up our compliance. This includes 
things like programming our computers, doing IT.'' Can anybody 
explain to me, articulate for me a clear, defined, absolutely 
crystal clear path that bank can follow in setting up those 
compliance regimes?
    Ms. White. You mentioned broker-dealer first. And at the 
risk of being accused of being the second alpha regulator, the 
SEC is the primary regulator of the broker-dealer. I think we 
would be the first stop on that, and obviously, to the extent 
that other regulators are involved with other aspects.
    Mr. Mulvaney. I want to cut you off. You are the first 
stop, but certainly not the only stop. Right?
    Ms. White. Right.
    Mr. Mulvaney. They go to you first. My guess is that 
somebody else might think they are also primary, or certainly 
an important secondary. Is there a single plan that this 
institution can follow in order to create a compliant system to 
meet the requirements of the rule? I think the answer is no, by 
the way. I am not trying to trick anybody. But that single 
clear plan doesn't exist, does it?
    Ms. White. I think, again, that we come to the primary 
regulator first. To the extent there were other issues that 
other regulators had an interest in, I think, as the primary 
regulatory, we would basically initiate those discussions.
    Mr. Mulvaney. But if they need it today, that doesn't 
exist. Right?
    Ms. White. No. It does exist today.
    Mr. Mulvaney. So a broker-dealer can come to you and say, 
look, this is what we want to trade in next year. And could you 
tell them without any concerns whatsoever, if you do X, Y, and 
Z, you are going to be fine?
    Ms. White. That wouldn't be the initial conversation on the 
spot. But, to the extent that the consultation with the other 
regulators led to that result, which you would hope it would. 
Very quickly, actually.
    Mr. Mulvaney. Governor Tarullo?
    Mr. Tarullo. Congressman, I think you asked the right 
question. But there are a couple of things about this. First, 
to a considerable extent, and I don't know exactly what one 
hears from everybody, but what I heard a lot of from the 
industry was when it came right down to it, they didn't 
actually want two very specific sets of quantitative metrics 
right now because they were fearful that any set of metrics we 
would come up with now would not take into account the 
variations in things like relative depth of liquidity.
    Mr. Mulvaney. Let me skip ahead in the future, then, and 
see if I can articulate another challenge which I am concerned 
that we face, which is, this entity is now trading this 
particular facility. The Fed says it is okay. And then a couple 
of weeks later, the OCC says it wasn't. The Fed says the trade 
was okay; the OCC--or, pick one; it doesn't make any difference 
who it is. One of you say it is okay; the other says it is not. 
Is there a defined, clear regime that they can follow to 
resolve that inconsistency?
    Mr. Tarullo. Congressman, the trade itself will take place 
within a specific legal entity. Whoever is the primary 
regulator of that entity has, by congressional delegation, the 
regulatory authority over them. So, in the end, they are--
    Mr. Mulvaney. And if they say it is okay, then this bank is 
fine. It doesn't make any difference what anybody else at the 
table says.
    Mr. Tarullo. If it is a broker-dealer and the SEC is okay 
with what practice the broker-dealer is pursuing, then none of 
the rest of us has the authority, under the Volcker Rule and 
the statute, to say, no, that is incorrect.
    Now, as you have heard all of us say, nobody wants to be in 
the position of which de facto there is inconsistent 
information being given to people in different legal entities. 
So that is what we are striving to avoid. But there is not 
really shared jurisdiction over a particular trade that is 
going to take place--
    Mr. Mulvaney. Why do we need a working group, then? If you 
are in charge of one type of trade, why do you have to have a 
working group on that trade?
    Mr. Tarullo. Because we would want to assure that the same 
kind of activity pursued in a broker-dealer or a London 
subsidiary of a U.S. bank holding company or a national bank is 
treated about the same, even though there are different primary 
regulators. That is the reason for the coordination.
    Mr. Mulvaney. Thank you.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. I have been listening to this hearing, and it 
sounds like Wall Street. It sounds like the interior pages of 
the Financial Times. And I want to try to bring this down to 
how it is going to affect local businesses in our own 
districts.
    Because this Volcker Rule is going to prevent certain 
entities from buying and holding certain securities under 
certain conditions. We have plenty of entities that will invest 
in the S&P 500. The super creditworthy, super prime borrowers 
are getting lower interest rates and better terms than at any 
time in decades. And the American economy, if it fails, will 
not fail because, in 2014, there weren't enough entities and 
funds and hedge funds buying stocks and bonds from the biggest 
corporations. If we fail, it will be because you can't get a 
$250,000 loan for a startup business; you can't expand your 
business and get a $10 million loan. The $50 million financing 
necessary by medium businesses is completely unavailable.
    Now, sitting where the witnesses are now, we had Jamie 
Dimon awhile ago, who said he just couldn't find good business 
borrowers in the United States. He had all this money, and 
didn't know what to do with it. He sent it to London, and it 
was eaten by a whale. All of us in every part of this room know 
good businesspeople who should be getting loans and aren't 
getting them. And those are the businesses that are going to 
have 100,000 employees 20 years from now, 10 years from now if 
they get financing, and we have a system where they can't.
    We have big banks that only want to buy securities. They 
are itching to make big bonuses on the sophisticated financial 
transactions involving tens of millions of dollars or hundreds 
of millions, billions.
    And then we have regulators, who I am told when you see a 
loan at prime plus 5, prime plus 6, instead of saying thank you 
for making that loan to a business that isn't perfectly 
creditworthy, you need a little bit more capital to do that, 
instead, regard the banker as somehow betraying the financial 
system for doing what Jimmy Stewart told us in ``It's a 
Wonderful Life'' a bank is supposed to do.
    What can you do as regulators to prod the banks into making 
those small- and medium-sized business loans, instead of using 
all their capital on Wall Street? And what can you do as 
regulators to stop penalizing banks because they make loans 
where there is a 1-in-20 chance that the loan will go bad, even 
a 1-in-50 chance that the loan will go completely bad, and ask 
only for reasonable reserves, rather than a view that the bank 
has violated its charter by making a prime plus 6 loan? I will 
address that to anyone on the panel. Mr. Curry?
    Mr. Curry. Congressman, from our standpoint, as a 
prudential regulator, we do want to see banks lend to 
creditworthy borrowers. And that is really--
    Mr. Sherman. If I could interrupt, it used to be that 
character mattered, that relationships mattered. That banking 
was an art and you evaluated whether the person could pay you 
back. Do you let your regulators look at that at all, or is 
character thrown out the window?
    Mr. Curry. We look at underwriting processes that the 
individual institution has. As long as they adhere to safe and 
sound underwriting practices, that should be it.
    Mr. Sherman. It is now--I wish that was true in the San 
Fernando Valley, sir. All I hear is, ``We made a loan; the fair 
rate of interest was prime plus 5; therefore, we were in 
violation of what the regulators expected us to do.''
    Let me ask one more question. And that is, this whole 
Volcker Rule is designed to prevent the need for future 
bailouts. But the fact is that as long as we have institutions 
which are too-big-to-fail, they are going to engage in risky 
behavior, especially if they are not banks. And then they are 
going to come to Congress and say, We are going to pull down 
the entire economy with us if you don't bail us out.
    This bill gave you the right to break up the too-big-to-
fail. Why aren't you using it?
    Chairman Hensarling. Seeing no witness take up the question 
and given that the time of the gentleman has expired, the 
witnesses may answer in writing.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank each of you for being here today. Much has been 
said from my colleagues on the other side today lauding the 
Volcker Rule, as they have hundreds of other rules that have 
been promulgated, lauding Dodd-Frank, lauding your efforts. I 
think, frankly, it just bears some questions in my mind as it 
relates to the implementation of this rule and the impact it 
will have.
    I quote Mr. Volcker. He acknowledged that the activity 
sought to be prohibited by the rule had nothing to do with 
causing or exacerbating the recent financial crisis.
    Mr. Geithner said, ``If you look at the financial crisis, 
most of the losses that were material for the weak institutions 
and strong relative to capital did not come from those 
proprietary trading activities. They came overwhelmingly from 
what I think you can describe as classic extensions of 
credit.''
    So it begs the question to me of the importance of this 
rule and the impact it is going to have in a counterproductive 
way. What do you say to the American people, what do you say to 
those consumers, to those banks who can't find capital, to 
consumers who need help with their businesses, to the 
compliance costs of these banks and the time afforded, that the 
impact of what we are having, if, in reality, those who would 
seemingly know best have said that it had really no core 
relationship to the financial crisis as relates to systemic 
risk?
    What is your opinion of that? And if we don't have a clear 
understanding of that, where do we go from here? It is 
troubling to me that so much has gone into this now, this 
enormous impact of this rule on top of rule after rule and the 
impact it is going to have. Could you kindly comment on why we 
are here today?
    Mr. Tarullo. In the first instance, Congressman, we are 
here today because you called a hearing asking to get an 
explanation of what we did to implement a law that Congress 
passed. And in the first instance, I think many of us have 
mentioned this, but we do have to come back to the fact that 
this is a judgment that Congress made, and it is, as I tried to 
explain earlier, I think, a piece of a broader regulatory 
system that is being put in place post-crisis. So I think that 
is probably the most important point. And we are obviously 
bound to implement whatever it is that Congress passes.
    Second point, as I did say earlier, is I think--
    Mr. Pittenger. Quickly, because I would like to hear from 
four other people.
    Mr. Tarullo. Okay. If you ask those who developed the 
Volcker Rule in the first place, possibly even including former 
Chairman Volcker, I think they might say--
    Mr. Pittenger. The point is, though, they said clearly it 
had nothing do with systemic risk.
    Mr. Tarullo. I think what they would probably say--
    Mr. Pittenger. But that is the point that my colleagues are 
making, that we just don't get it.
    Mr. Tarullo. As you try to adjust a financial system to the 
integration of capital markets and traditional lending, they 
would say you have to be aware of the problem already 
encountered but other problems that you might encounter.
    Mr. Pittenger. Thank you.
    Chair White, do you have any comments you would like to 
make?
    Ms. White. The only thing to add is that Congress again 
made the judgment that the Volcker Rule would promote financial 
stability and protect the taxpayers from future crises and 
losses.
    Mr. Pittenger. They did make that decision, my colleagues 
on the other side of the Dodd-Frank bill. It just begs the 
question to me if, in fact, it had no bearing according to 
these apparently major individuals in the financial world, Mr. 
Volcker, Mr. Geithner, it begs the question seriously to the 
American people and to financial institutions the impact it is 
having in terms of availability of capital as well as the 
compliance costs related to it.
    Any other comments?
    Mr. Gruenberg. Only to acknowledge that I think former 
Chairman Volcker in proposing this idea perceived these 
activities as posing systemic risk. And I think he, from his 
perspective, which was the impetus for this, saw it as a 
significant source of systemic risk going forward. And that is 
what he proposed addressing. I can't disagree with that 
premise--
    Mr. Pittenger. So we are an answer looking for a problem. 
That is what was stated earlier. Thank you. Would you like to 
make a comment?
    Mr. Wetjen. I was just going to add something similar to 
what Chairman Gruenberg said. I think it is also a prospective-
looking policy as well.
    Mr. Pittenger. Thank you very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman.
    And thank you to the panelists.
    I would like to return for a moment to the CLO issues.
    Chairman Gruenberg, on, I guess, page 10 of your testimony, 
you mentioned that securitization that currently includes 
assets other than loans can be excluded from the definition of 
covered funds if they divest impermissible assets during the 
conformance period.
    And my question to you is, is that really realistic in 
light of the fact that the managers of the securitizations 
actually have a fiduciary duty to all their investors and not 
just some bank that may have a relatively minor position in the 
fund? And how would you get past that legal morass on the time 
scale needed?
    Mr. Gruenberg. As I indicated earlier, I think in many 
cases, it is feasible for that to be done. As you indicated, 
for CLOs in which they are only made up of loans, they are not 
subject to the Volcker Rule. There are the category of CLOs 
that have impermissible assets. I think--and there are a lot of 
those which have relatively small numbers of impermissible 
assets, a small volume. I think in that case potentially 
divesting those assets, so-called curing the CLO for purposes 
of compliance with the Volcker Rule is manageable. For others 
with larger numbers of impermissible assets, it poses a greater 
challenge and I think would be the focus, frankly, for our 
review of the issue.
    Mr. Foster. I would like to just ask more general questions 
about the grandfathering and the legacy issues that Governor 
Tarullo mentioned. For example, the immediate mark-to-market 
that is triggered when you have to sell these things, there is 
a potential, I guess, for possible capital relief, if that gets 
triggered. And just the need for clarification is I think very 
important. If you look at the drop in new CLO issuance, which 
has been going around at maybe 6 billion a month has now 
dropped to less than 2 in the last month, sort of underscores 
the need for clarification as soon as possible on this.
    And just the other area that is important for--as it 
relates to grandfathering is just the fire sale scenario and 
what can you do to mitigate that if in fact there is a big 
class of these that has divested. So do you have any comments 
on this, just general comments on the range of the most 
aggressive grandfathering, the least aggressive grandfathering 
that you can imagine emerging from future deliberations?
    Mr. Tarullo. Congressman, as Chairman Gruenberg indicated, 
I think those are several of the issues that we want to get 
more information on, which is to say first the breadth of the 
issue. Because if we are not facing that widespread an issue, 
the fire sale problem is probably going to be minimized. But if 
that is not the case, then you say, okay, is the timeframe that 
is already provided adequate? And, of course, that actually 
depends on whether the instrument in question has been 
depreciating in value or appreciating. But we are getting 
information on this, and I think we will have more, and we will 
be able to make a more granular decision on the questions that 
you pose.
    Mr. Foster. Do you have a time scale when you might make 
those decisions?
    Mr. Tarullo. I don't want to speak for everybody in saying 
we have a timeframe. I think, as I said earlier, and as 
somebody else reiterated, it is the top of this list of this 
interagency group to be addressed. It is the second of the 
important interpretive issues.
    Mr. Foster. I guess I have time to change topics for a 
moment. In the securities lending part of the Volcker Rule, I 
was struck by, I guess, that at the point the Government seized 
AIG, 40 percent of the losses were from securities lending. So 
this is not necessarily a safe operation in all business 
conditions. I was just wondering if everyone here is satisfied 
that what is done in securities lending is going to--obviously, 
AIG was not a bank. But those sorts of losses would be 
prevented in advance by the way securities lending is dealt 
with.
    Mr. Tarullo. I, myself, do not, Congressman. This is one of 
those areas where, as I said in my prepared remarks, we can't 
rely just on the Volcker Rule to assure the safety and 
soundness of trading operations. And I do think under this more 
general heading of addressing the risks associated with short-
term wholesale funding, that the risks associated with 
securities financing transactions and the margining practices 
do need to be addressed for just the reasons you identify.
    Mr. Foster. Okay. Thank you very much.
    I am almost out of time. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Illinois, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    And I thank you all for being here. I want to start quickly 
just by commending the regulators represented here for 
acknowledging in the preamble this impact disruptions in the 
tender option bond market may have on municipalities and the 
market for certain municipal securities. I certainly hope that 
as banking entities who wish to continue participating in this 
market, as they work to make their tender option bond vehicles 
Volcker-compliant, that they will find your cooperation and 
assistance. I think that is very important.
    I want to address this first question to Governor Tarullo. 
And ask if any of you have responses, as well. But how can one 
posit that a $6 billion trading loss, which resulted in no 
taxpayer losses and resulted in a profitable quarter and year, 
evoke outrage, but a loss of twice as much in regulatory fines 
is never mentioned? Is that illogical? And should we no longer 
fine Wall Street banks because it threatens the stability of 
the financial system?
    Mr. Tarullo. Congressman, I think that the concerns 
elicited by the Whale episode were the concerns associated with 
the problems that led up to it, that is, why did it occur? Why 
was risk management not being applied to the activities of the 
firm? It is a very good thing that the firm was as highly 
capitalized as it was. And, it underscores what I have always 
said is the importance of having a very well-capitalized firm 
because it can deal with unanticipated as well as anticipated 
problems. Just as if one saw an instance in which there had 
been a very poor underwriting job done of a particular loan 
which turned out to result in a loss that the bank could take, 
we would think our bank examiners would be negligent if they 
didn't go back in and ask, are other such problems 
proliferating and do you have systems in place which manage the 
risks correctly? And I think that was what the London Whale 
episode did. It showed a variety of infirmities in risk 
management, documentation of hedging, which directly do relate 
to the concerns of Volcker. But--
    Mr. Hultgren. I understand what you are saying. I do think 
there is--you also look at just the discrepancy of how things 
are approached, where regulatory fines are not acknowledged. 
And yet oftentimes are double the amount, oftentimes. I just 
think there is a question there of how we approach these 
things.
    Let me move on. I only have a couple of minutes here. I 
wonder if I could address this to Chairman Gruenberg. Some 
banks are certainly waiting until July 2015 to divest 
themselves of Volcker-prohibited securities. Prompted by the 
rule, we have already seen banks of CLO and re-REMIC 
portfolios. But in the case of re-REMIC, the status of these 
securities under the rule seems unclear. At least my office has 
heard calls for clarification. I wonder if you could please 
explain the status of re-REMIC securities under Volcker and if 
the treatment is universal, or are there different treatments 
for some agency re-REMIC securities compared to others?
    Mr. Gruenberg. Without getting into the--that is certainly 
one of the issues on our list to be reviewed, in addition to 
the tender option bonds and municipal securities issue that you 
mentioned at the outset. So, I would add the re-REMICs to that 
as well.
    Mr. Hultgren. Say that again? I'm sorry.
    Mr. Gruenberg. I would add the re-REMICs category to the 
first two issues you raised in your comments in regard to 
tender option bonds and municipal securities as matters that 
have been raised in terms of the application of the Volcker 
Rule and issues for us to review and consider.
    Mr. Hultgren. Again, I would echo from the opening remarks 
that I hope we can count on your cooperation and assistance. 
Because, again, I am hearing from folks back in Illinois, 
concern, uncertainty of knowing how these are going to be 
handled. So as that moves forward, I appreciate that it is a 
priority. My hope is that there will be good communication and 
cooperation as we work through further understanding of what 
they can expect here.
    In my last minute, I will open this up to anyone. This may 
get back to a lack of thorough economic analysis. But I wonder 
if any of you have seen or tried to estimate the impact of a 
Volcker-promoted forced sale of certain securities on the 
markets for those securities. And particularly, how will this 
affect community banks? Won't a forced sale in any part of the 
market drive the prices down and hurt potential returns?
    Mr. Curry. Congressman, that is certainly an issue that we 
are going to address as we review the CLO issue. So, it is a 
matter of concern.
    Mr. Tarullo. I think--just to supplement that--we have 
probably heard from those who think that they are in that 
situation. The TruPS issue quite possibly did pose, did pose 
that risk. It is not clear, at least based on current 
information, that there are other categories of things that 
would be subject to short-term divestiture which would provoke 
a fire-sale-like reduction in prices. But as others have said, 
that analysis of those things will continue.
    Mr. Hultgren. My time has expired. I yield back. Thank you, 
Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison, for 5 minutes.
    Mr. Ellison. Let me thank the chairman and also thank all 
of our witnesses today.
    I would just like to ask for unanimous consent to enter a 
particular article into the record from the American Banker.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Ellison. It is entitled, ``Volcker is Right. Prop 
Trading Kills,'' and it is by Donald R. van Deventer. And he 
essentially makes the following point, that I agree with: 
Congress asks you to prevent banks from engaging in proprietary 
trading because there is ample evidence out there that 
proprietary trading in certain cases resulted in harms to 
firms, families, the Nation, and our global economy. And it is 
not just JPMorgan Chase and the whole London Whale case. It is 
also Citigroup. It is also Bank of America, Morgan Stanley, and 
the Royal Bank of Scotland. These banks used their deposit 
insurance subsidy to trade in high-risk investments. Those 
instruments failed, which would have caused these financial 
Goliaths to fail but for government assistance.
    So, I just put that in there. If you care to comment on 
that, my comment or this article, feel free to do so. But I 
think a lot of my colleagues have gone over the Volcker Rule in 
particular. So because it is not all the time that I have this 
kind of expertise here, I am going to ask about some other 
things.
    First of all, I would like to ask Mr. Wetjen a particular 
question. Mr. Wetjen, I am a supporter of fair, robust 
regulation of financial markets. I am also concerned that the 
SEC and the Commodity Futures Trading Commission don't have 
adequate funding to do the job we have asked them to do. I 
wonder if you would reflect on what I just said. If you were 
funded at, say, an additional 5 percent of your current level, 
what would you be able to do to build on your efforts to 
oversee the market? Could you address this issue?
    Mr. Wetjen. Congressman, I appreciate the question. As I 
mentioned in my opening remarks, we are resource-constrained at 
the CFTC. We have taken on significant new responsibilities 
since the passage of Dodd-Frank, mostly as it relates to 
derivatives reforms under Title VII, but also as it relates to 
Volcker. So it continues to be a challenge. We do need 
additional staff. We do need additional technology investments 
to help decipher, make sense of the data that has been coming 
in for a number of years. But some of the additional data 
related to swaps has come in more recently, within the last 
year. So, it is definitely an issue of concern for me.
    Mr. Ellison. Thank you, sir.
    Ms. White, would you like to address this issue?
    Ms. White. Yes. Thank you for the question as well.
    The SEC, again, as I said earlier, we are resource-
constrained. And in order to carry out the really vast 
responsibilities we have, even apart from Dodd-Frank 
implementation issues and JOBS Act implementation issues, we 
need more people to do that, more experts to do that. So, we 
appreciate the question.
    Mr. Ellison. Thank you.
    And sticking with you, Chair White, on December 12, 2013, 
the Consumer Financial Protection Bureau (CFPB) released the 
preliminary results of their study on the use of mandatory pre-
dispute arbitration provisions in consumer financial products. 
The study found an overwhelming majority of consumers must 
participate in mandatory pre-dispute arbitration agreements. 
Your agency, like the CFPB, was given authority under Dodd-
Frank to act to study the use of mandatory pre-dispute 
arbitration clauses in customer contracts.
    I am concerned about the prevalent use of these clauses and 
contracts that investors in my State and across the Nation 
signed as a condition to working with their brokerage and 
investment advisor firms. Is this a cause of concern for you? 
Do you have a position on these pre-dispute arbitration 
provisions? And have you had a chance to study the effect of 
these contracts?
    Ms. White. There are very strong views on that issue, on 
both sides, as you have indicated. A number of people have 
raised serious concerns about that. At the Commission, we have 
the authority to decide whether to act and what to do about 
that. We have not yet come to an agreement on that. We clearly 
will have further briefings from the staff on that and focus on 
that in the relatively near term. But I can't tell you what the 
outcome will be at this point.
    Mr. Ellison. Okay. All right.
    I think I have a few seconds to go. And with that time, I 
would like to just see--Mr. Curry, if you don't have time to 
answer, if you could just respond in writing. I have had a lot 
of constituents with Islamic-sounding names telling me they are 
losing access to bank accounts. I wonder if you have seen this 
coming up, if it is something that has come to your attention, 
and if there is any response you may have.
    I see the light is red. Maybe could you respond in writing.
    Mr. Curry. I would be happy to get back to you. I 
understand that is an issue in your district, and we are 
looking into it.
    Mr. Ellison. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner, for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman.
    And thank you, panelists. This committee has received 
voluminous testimony from corporate CFOs, community banks, and 
academic experts that the costs of the Volcker Rule will dwarf 
its highly speculative benefits and that the rule will do 
significant damage to job creators and to our economy. In fact, 
the chairman referenced in his opening statement the academic 
research conducted by Washington University in St. Louis, in my 
district, which concluded that the Volcker Rule will take $800 
billion out of the economy.
    Now, given the extensive evidence and testimony from those 
on the ground that the Volcker Rule will do far more harm than 
good, and given that you did not do a formal cost-benefit 
analysis, can someone on the panel please let me know what your 
evidence is to the contrary? Because I can't find the benefits 
in your 932-page rule.
    Chair White?
    Ms. White. I would say this, as I said earlier, obviously, 
there was, to begin with, a congressional judgment made to 
require the Volcker Rule. The agencies are all charged with 
carrying that out to be both faithful to the statutory mandate 
but also very--which is part of the statutory mandate, also 
very sensitive to the exemptions from that rule. We clearly, 
all of us in the process of this rulemaking, from the proposal 
stage to the adoption stage, solicited information and data and 
analyzed data on the impacts.
    Mrs. Wagner. What are the results of that data?
    Ms. White. I think you saw the results of that. That 
inquiry and analysis led to changes that I talked about earlier 
in order to reduce some of the negative impacts of the rule, 
the costly impacts of the rule. But we began with a statutory 
mandate to carry it out.
    Mrs. Wagner. I listened to some of your testimony. And 
specific to the SEC, Chair White, I think you said you 
thoroughly addressed the economic considerations of the rule. 
And I am trying to figure out where that is. Has a formal cost-
benefit analysis been done on this by the agency?
    Ms. White. It depends, I guess, to some extent what you 
mean by ``formal cost-benefit analysis.'' The statute--
    Mrs. Wagner. Where is the report? Where is the research? 
Where is the information? Where is the report?
    Ms. White. The statute under which we enacted the rules of 
the Bank Holding Company Act, it doesn't specifically require 
or even implicitly require a formal cost-benefit analysis. What 
we did do, all five agencies did do, was to tee up a full range 
of questions as to the economic impacts, and solicited the 
data. And if you look at the adopting release, you will see 
those discussed throughout in terms of the agency's thinking on 
that and conclusions on that.
    Mrs. Wagner. A lot of others have sure done analyses of 
these. And all I am seeing is cost, cost, cost, cost, cost 
coming from the business side, from the academic side, and from 
many experts on this. And I would be very interested in knowing 
just where specifically in all of the analysis that you have 
done, where the benefit side of this is. I would submit that 
this is a very costly rule to our economy and to the American 
people.
    Turning to something different, following up on Mr. 
Mulvaney's line of questioning, I am a little concerned about 
this working group and who has the power of enforcement, what 
lanes each one of your agencies are staying in. Who is in 
charge of the working group that you formed? Have you formed a 
working group?
    Mr. Tarullo. Yes. But by definition, as with all 
interagency committees, the agencies are independent and they 
each have a role, which has been given by statute.
    Mrs. Wagner. Who is in charge of the working group?
    Mr. Tarullo. Nobody is in charge of the working group.
    Mrs. Wagner. Have each of you assigned somebody to the 
working group?
    Mr. Tarullo. Yes.
    Ms. White. Yes.
    Mrs. Wagner. So you have a list of those who are assigned 
to this working group. For instance, will the SEC's Enforcement 
Division have to consult with the working group before opening 
a Volcker Rule investigation?
    Ms. White. The answer to that is we are not required to do 
that, no. We are an independent agency and are not required to 
do that. Again, however, everyone is focused on consistency 
across the agencies.
    Mrs. Wagner. You are focused on consistency, you each have 
your areas of jurisdiction, you say you have formed a working 
group. I am just confused as to who has the power of 
enforcement, and what happens when you differ?
    Perfect example: Let's say the OCC approves a trade or a 
trading strategy that a bank is doing, and then 6 months later 
the SEC comes in and says that those trades were in violation 
of the Volcker Rule. How do you resolve that conflict?
    Mr. Curry. At the OCC, we supervise the national banks and 
Federal savings banks. We have the authority and we examine on 
a regular basis to see if they are in compliance with all 
rules, including the Volcker Rule. If they are in violation of 
it, we have the enforcement authority. If it is a question of 
judgement as to whether--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Murphy, for 5 minutes.
    Mr. Murphy. Thank you, Mr. Chairman.
    And I want to thank all of the witnesses for your time and 
your testimony today.
    I know this has been talked about quite a few times today 
already, but I just want to follow up. Last December we had 
Secretary Lew here in front of the committee, and I asked him 
how the five agencies that are here today were going to split 
up the responsibility of implementing and enforcing the Volcker 
Rule.
    He said the current regulatory structure would flow through 
to the Volcker Rule depending on an institution's primary 
regulator and the products they trade. However, there are quite 
a few financial institutions in our country that are working to 
try to comply currently, and it has become clear to us that two 
or more different agencies could be responsible for supervising 
and enforcing the Volcker Rule for one institution.
    How is this going to work and who is ultimately going to be 
responsible for each of these discrepancies? And we can just go 
left to right.
    Mr. Tarullo?
    Mr. Tarullo. Again, Congressman, there will only be one 
primary regulator for any given financial institution or an 
affiliate within a bank holding company. That is the way the 
law allocates responsibility.
    Mr. Murphy. And they will know ahead of time, they will 
know as of now--
    Mr. Tarullo. Yes. Broker-dealers know who they are, State 
member banks, non-member banks, yes.
    The inconsistency issue comes up across either different 
affiliates or different institutions. It is the effort to 
assure consistency in interpretation within broker-dealers on 
the one hand and national banks on the other that animates the 
coordination efforts.
    Mr. Murphy. I see some heads nodding, but is everyone in 
agreement?
    Ms. White. If I could just add, taking broker-dealers, 
again the SEC is the primary regulator of the broker-dealer, 
primary examiner of broker-dealers as well, and will in fact be 
primarily responsible for their compliance with Volcker.
    Mr. Murphy. Okay. Mr. Curry?
    Mr. Curry. It is our goal from the beginning to make sure 
that we have consistent application of the rules. We view this 
working group as the mechanism for doing it so that when we do 
apply it to the entities that we regulate as the primary 
supervisor, in my case national banks and Federal savings 
banks, we know that we are doing it in a consistent manner, 
that there is not a material difference between the treatment 
between a bank versus a broker-dealer under a bank holding 
company.
    Mr. Gruenberg. The issue here is created by the fact that 
we have diversified financial companies in the United States 
with multiple entities with different functions and different 
regulators. So you could have in the same company a national 
bank, a broker-dealer, and a State-chartered institution, all 
under a holding company structure, each with a regulator 
responsible for the activities of their particular part.
    So coordinating that is really the challenge. It is why all 
of the agencies here have responsibilities for some part of 
that diversified firm, and it is why the rule required all of 
the agencies here to participate. And the challenge of 
implementation is really going to be identifying the lead 
regulator for the part of the company that is impacted and 
having that regulator engage with the others. And that is a 
process that goes on in other areas of financial regulation, as 
has been pointed out, and is clearly going to be a key 
challenge here.
    Mr. Murphy. Mr. Wetjen?
    Mr. Wetjen. Thanks, Congressman.
    The only thing I would add is that the statute makes it 
very clear that we have an obligation to coordinate. And the 
other point I would make is something I mentioned in my oral 
statement, and Governor Tarullo reiterated it today at the 
hearing, which is there have been opportunities for at least 
the CFTC and the SEC to go their own way given what was 
required in the statute. That is not the choice that was made. 
Instead, we went beyond what was required in an effort to try 
and be faithful to the requirement under Section 619 that we--
    Mr. Murphy. We are running low on time here. I just want to 
follow up, and I am wondering if you all fear that there are 
going to be different interpretations? And the reason I ask 
this is because when Secretary Lew was in here, he expressed 
confidence that, ``This leaves some space for supervisors to 
engage with the entities that they supervise to work through 
some detail.''
    So if this is a constant process of interpretation, how do 
we ensure that there is consistency?
    Mr. Curry. Again, we decided that it was important to have 
a formal forum, and the working group was created for that 
purpose.
    Mr. Murphy. So all in the working group? Okay.
    Mr. Tarullo. It is probably important to note, Congressman, 
that a lot of the issues, particular kinds of instruments that 
are traded at broker-dealers, are not likely in many instances 
to be traded at national banks. So in a lot of cases, they 
actually won't be things that cross a lot of lines, but in some 
they are, and that is where the coordination and consistency 
mandate comes in.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    It has been interesting reading some of the reports that 
have come out about you all working together, the dysfunction, 
withholding documents, backstabbing, cutting people out, 
soliciting to get people to come across town for fried chicken. 
It is kind of like Congress. Maybe that was very effective.
    You have had a lot of questions about the proposed rule and 
final rule and a lot of commentary about the economic analysis, 
and I am going to stick to those topics. I think it is fair to 
say that there was concern that the questions that were brought 
up in the proposed rule were far different than the actual 
final rule. And many of us argue you should have reproposed the 
rule to solicit further commentary.
    I think a perfect example of that is there was surprise 
with regard to the CLO issue and the TruPS issue. Had you 
reproposed the rule, you would have been able to solicit 
commentary and get some insight into folks' concern.
    Why didn't you repropose the rule? The best reason I have 
heard is, we had an arbitrary timeline that we were trying to 
meet. But beyond that, it makes sense that you would have 
reproposed it and solicited comments. Why didn't you do that?
    Ms. White. As I said earlier, that is an issue that I 
considered independently. I think two of my Commissioners have 
commented on that. And the judgment was made, both in 
consultation with counsel, there was no requirement, given 
where the adopting rule was coming out, that we repropose.
    Mr. Duffy. With all due respect--
    Ms. White. But we had a 2-year period of extensive input. 
And we teed up some of the questions that could have elicited 
some of these facts that have come out since then.
    Mr. Duffy. There are requirements and there are best 
practices. And you are aware of best practices as well.
    Ms. White. Absolutely.
    Mr. Duffy. And, I would ask you all, how many comments did 
you receive about CLOs and TruPS? Probably not very many, 
because it wasn't included in the proposed rule. And there was 
a whole slew of issues that don't match up. And I think the 
best practice, though you may not have been required, would 
have been to repropose the rule and get additional input from 
participants. And I still haven't heard a good reason why you 
wouldn't have done it except for this arbitrary timeline.
    Does anyone have a better reason?
    Ms. White. It wasn't an arbitrary timeline. I made the 
judgment that there was market uncertainty out there as well, 
we had had a 2-year period of extensive engagement on these 
issues, and that we should go forward.
    Mr. Duffy. We are talking about market uncertainty, and I 
don't think we have done much to alleviate that. We might have 
aggravated the problem of uncertainty with the rule itself. And 
frankly, I think, Ms. White, you had said that it wasn't wise 
to do a reproposal, which doesn't make sense to me, either.
    But I want to move on to the economic analysis. Ms. White, 
you have indicated that an economic analysis was done, I think 
you referenced the preamble to the rule. But you are very well-
versed in doing economic analysis at the SEC. You are required 
to do it for the rules that you put out, the Division of 
Economic and Risk Analysis. Did you do one of those for the 
Volcker Rule?
    Ms. White. As I said earlier, I think what you are alluding 
to is our guidance, which actually does not require that it be 
applied, but I am a great proponent of that.
    Mr. Duffy. Binding guidance, yes.
    Ms. White. In this instance, again, we all as regulators 
really thoroughly addressed the economic considerations.
    Mr. Duffy. No, no, no--
    Ms. White. Because it was a joint rulemaking, the dynamic 
of the joint rulemaking, I know that no agency's specific 
guidance applies to each other.
    Mr. Duffy. My question for you is simple: Did you do it?
    Ms. White. But we did do the analysis I have described.
    Mr. Duffy. You didn't go through the appropriate channels 
of doing an economic analysis which you do for other rules that 
you implement, right? No. You did not do that.
    Ms. White. The framework of our guidance wasn't applied, 
but we did--
    Mr. Duffy. If you did that analysis--
    Ms. White. --absolutely thoroughly consider economic 
considerations and responded to them.
    Mr. Duffy. If you would send me the report, I would love 
that.
    Do you object to now, ex post facto, doing an economic 
analysis, as done by the Division of Economic and Risk 
Analysis, per the memo from Ms. Schapiro?
    Ms. White. Again, I think we have done that analysis and we 
are focused on implementation at this point.
    Mr. Duffy. You have done that analysis, the Division of 
Economic--
    Ms. White. We have done the economic analysis that I have 
described and I think--
    Mr. Duffy. Do you object to doing the one that is 
consistent with the memo of Ms. Schapiro when you do other 
rules through the SEC? Will you do that same analysis for us ex 
post facto? Yes or no?
    Ms. White. Even though we have--
    Mr. Duffy. Is that a no? I only have a couple of seconds 
left.
    Ms. White. The guidance wasn't applied. I don't think it 
would be constructive at this point to do that, for the reasons 
I have indicated.
    Mr. Duffy. And I guess just quickly, I have a bill out that 
will amend Section 13 of the Bank Holding Act. So if you are 
going to make any modifications to the Volcker Rule you 
actually go through an economic risk analysis. Any objections 
to going through that process should there be any modification?
    My time is up, Mr. Chairman. I hear you pounding the gavel. 
I will yield back.
    Chairman Hensarling. If the gentlelady wants to give a 
quick one-word answer?
    Ms. White. I think I answered, sir.
    Chairman Hensarling. Okay.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    And I thank each one of you for being here today.
    I think it was Mrs. Maloney earlier in the hearing 
suggested that we concentrate on implementation. There has been 
a veritable cascade of questions on implementation, and that is 
where mine will fall. The subject has been finely tuned at this 
point of the hearing.
    Mr. Himes really got down to the point. Chair White, you 
had affirmed that we have an acute awareness that we need to 
work together. And I am not sure exactly what Mr. Tarullo might 
have said that got him the alpha, whatever designation he got, 
but something along the lines that the process is well-
established and we don't see why we would have trouble.
    But Mr. Himes went ahead and got a little more focused and 
said, are you going to have a formal process? And I think your 
response, Mr. Tarullo, was that if it is so warranted, yes, we 
will do it if, it is warranted.
    And I guess my question is, are there circumstances that 
would warrant it that you can come up with in the recent past, 
or circumstances where you really come together and you all 
agreed on who said the football went over into the end zone. So 
are there good examples of coordination or bad examples of lack 
of coordination?
    Mr. Tarullo. Congressman, I think as you and a number of 
others have suggested, at least implicitly, this is a new kind 
of exercise here, because it has the banking regulators for 
whom there is a long track record of coordinating on an ongoing 
basis with the market regulators. So I don't know that the 
precedents based on the bank regulatory cooperation will carry 
over. I think they will.
    The reason I answered earlier that at some point something 
more formalized could be useful is because I just don't know at 
this juncture whether the success in having three agencies with 
staffs who have known one another well in doing coordination, 
all of whom are bank regulators, will carry over. I think it 
will, but it may not. And if it doesn't, then we may need to 
formalize things a little bit more.
    Mr. Pearce. I think from this side of the aisle, I would 
refer to a Washington Post article of 2012, and it is referring 
to exactly such a circumstance. It leads in saying that part of 
the problem is that the different agencies weren't 
communicating, specifically talking about the SEC.
    Mr. Wetjen, Mr. Luetkemeyer was the last to call on you. 
But with your two agencies, within the final paragraph or next 
to the last paragraph it says, when the agencies began talking, 
they worked at cross purposes. The report said that in one 
instance the SEC asked MF Global not to take the money set 
aside to help cover funds owed to the securities customers, 
while the Trading Commission told the firm to do exactly the 
opposite, to cover the firm's future customers. And so that 
resulted in $1.6 billion being taken out of segregated 
accounts. And we have people sitting in the room who are 
supposed to stop this. It is against the law to do that. And 
the regulators on such a major issue are exactly opposite.
    And so you heard Ms. Wagner's questions. Who is driving? 
Who will be the one to cut the baby in half or whatever we are 
going to do to make a decision here? I think there is a need 
for a formal process. I went through the table of contents of 
your stuff, I didn't go through the full 900 pages, I thought I 
could find it, to where maybe you did address that if we come 
to a crossroads, that so and so is going to be the alpha male, 
female, or whatever--I don't know if I would use the word that 
Mr. McHenry did--but still somebody has to be in charge, 
otherwise we wind up with customers getting nailed for $1.6 
billion.
    Have you done a postmortem between the two agencies, how 
did this thing occur, that the regulator is sitting in with 
Senator Corzine and he takes $1.6 billion?
    There was another article, by the way, which says the 
authorities came to believe that an employee in MF Global's 
Chicago office transferred the customer money, perhaps 
inadvertently.
    Do you know how that sounds to our constituents, just an 
inadvertent transfer of $1.6 billion? Did you do a postmortem, 
either one of you, of the whole group? Has the working group 
sat and looked at the MF Global circumstance to say there are 
really reasons we need a process here?
    Mr. Wetjen. I think, if I could say, the real postmortem in 
the MF Global situation is that while it is obviously a 
horrible circumstance where for some amount of time there were 
customers--
    Mr. Pearce. Could you speak up just a bit? The postmortem 
was what?
    Mr. Wetjen. I'm sorry. What I was trying to say is that the 
real postmortem is that while there were customer moneys lost 
for some amount of time, they are all going to be recovered in 
the bankruptcy process.
    Mr. Pearce. Okay. Mr. Chairman, please, I know I am over, 
but I am hearing one of the top regulators in the country say 
no harm, no foul. I'm sorry. That was your response, sir, that 
the money is going to be recovered. That is beside the point. 
It was against the law to take the money out, and one of the 
top five regulators in the country said no harm, no foul.
    I yield back, Mr. Chairman.
    Mr. Wetjen. Congressman, that is not what I said. In fact, 
there are enforcement actions under way to address what was 
happening in the MF Global situation. I was simply pointing out 
as far as any discrepancies at the staff levels between the 
agencies, those were unfortunate. I am not aware of what those 
discrepancies were. But the good news, the silver lining, if 
you will, is the fact that the moneys will be recovered.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    I know we have covered this ground a little bit today, but 
I do want to continue the discussion about how the Volcker Rule 
as currently structured would have the serious potential to 
disrupt the collateralized loan obligation market.
    In particular, I am concerned about the impact that it 
could have on banks, some community banks in my home State of 
Kentucky. Obviously, these banks are looking for an attractive 
risk adjusted return, but as you know, the final rule 
arbitrarily converts AAA CLOs from debt securities into the 
equivalent of equity, thereby making them ineligible to be held 
by banks. It is estimated that banks would have to divest or 
restructure up to $70 billion of CLO notes if the rule as 
currently structured continues as a final unamended rule.
    And I want to share with you just a comment from a 
community bank, or part of a letter from a community bank to 
you all as the regulators promulgating this rule. This is a 
bank in my home State: ``We have invested $36.5 million in 
senior CLO debt securities, and they constitute 14 percent of 
our carefully managed investment portfolio. We view our 
investment portfolio as a conservative and much less risky 
component of our balance sheet.
    ``The final rule, if applied without clarification, could 
have a material negative impact to our capital base, which we 
have been trying to preserve after the losses incurred the past 
4 years. It is hard to understand as a management team that was 
able to take a financial institution through the darkest days 
of the financial crisis why we should be presented with another 
existential threat based solely on an arbitrary and expansive 
interpretation of this final Volcker Rule. It would be tragic 
if our efforts over the last 2 years were considerably set back 
as a result of this final rule.''
    And I would also note, I am concerned about the impact that 
it could have on credit availability for American companies, 
some in my district. Tempur-Pedic, which is a great company 
that has an innovative mattress that it has been able to 
provide to the American people, but, as you know, the CLOs 
currently hold approximately $300 billion in commercial loans 
to some of the most dynamic and job-producing companies in 
America.
    So it seems to me that the medicine that is being 
prescribed here, banks forced to sell billions in CLO paper in 
a fire-sale scenario and the loss of credit availability to 
dynamic companies like Tempur-Pedic in my district would be far 
more damaging to the credit markets than the perceived illness, 
which is the hypothetical that banks would suffer some kind of 
losses from holding AAA CLO paper. CLO paper, by the way, 
performed very, very well during the financial crisis.
    So I appreciate your testimony, Governor Tarullo, saying 
that this is a priority in the interagency working group, that 
you are going to reexamine this. I encourage you to do so on an 
expedited basis. But I want to know why this is even an issue 
to begin with, given the fact that the statutory language in 
Dodd-Frank under Section 619 carves out the sale or 
securitization of loans in market making.
    And I am just reading from the statutory language: 
``Nothing in this section shall be construed to limit or 
restrict the ability of a banking entity or nonbank financial 
company supervised by the board to sell or securitize loans in 
a manner otherwise permitted by law.''
    Why is this even authorized in Dodd-Frank?
    Mr. Tarullo. The short answer, Congressman, is because some 
of these CLOs don't have just loans in them that have been 
collateralized and bundled together; they have other securities 
as well.
    Mr. Barr. Okay. So if--
    Mr. Tarullo. If you have a pure CLO, it would not be a 
covered fund.
    Mr. Barr. Okay. So how do you reconcile that with the risk 
retention rules under Section 941? You are characterizing CLOs 
under that rule as debt, but under this rule you are 
characterizing them as equity. Am I missing something?
    Mr. Tarullo. No. Again, it is the presence of the other 
securities, other than the collateralized loans. So that is why 
I was saying earlier, there are two distinct issues here. One, 
will the CLO market adjust going forward to include only loans 
and to bundle them together, which would then come under the 
exemption you just cited? They may not, in which case we have 
to think about that, too. But as I earlier said, the legacy 
issues are for the many CLOs that include things other than the 
loans. And that is where, as I said, our process is going to 
have to see whether we can find--
    Mr. Barr. Ten seconds left, if I could. Could you give us a 
timetable on when you might be able to fix this and also 
whether the fix could be a grandfathering of existing CLO 
investments so as not to create turmoil?
    Mr. Tarullo. I can't answer either of those questions 
precisely right now other than to tell you that this is the 
first issue on the agenda.
    Mr. Barr. We may be following up with you on that 
timetable, because we do need a solution here.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    I thank the panel for taking time to be with us here today 
for this very important hearing. You have been here with us for 
a few hours. So thank you for taking time out of your busy 
schedules.
    Governor Tarullo, as you know, the Volcker Rule includes an 
extended transition period designed to allow the preexisting 
legacy private equity investments of banking entities to run 
off naturally. These investments provide capital to small and 
medium-sized businesses throughout the country.
    However, as currently written, the rule effectively 
prevents banks of any size from taking advantage of this runoff 
period for existing investments in illiquid funds, which seems 
contrary to the intent of the exemption. It also will force 
banks to liquidate these investments at fire sale prices.
    With that in mind, please tell me how you plan to address 
these issues so regulated banks are not forced into taking 
significant losses on the investments. When is the Federal 
Reserve going to address the comments that it received 
expressing concern with respect to this aspect of the 
regulations?
    Mr. Tarullo. So, Congressman, as I was discussing earlier 
with some of your colleagues, the timing is in part for some 
institutions driven by accounting rules where there has been 
depreciation of the assets in question.
    More generally, I think everyone on the panel knew that 
there would be some divestiture required as a result of the 
rule, and that is why the period was created. We will be 
looking, as I indicated in an earlier answer, to see whether 
the quantum of particularly covered funds that are going to be 
divested in the conformance period are such as to raise these 
kinds of risks of fire sales. That is the information we are 
going to be gathering and that we will presumably be getting 
from the firms.
    As someone mentioned earlier, a number of firms, 
particularly the larger firms, have already been divesting in 
anticipation of the rule.
    Mr. Rothfus. Yes. We will be following up with you on that 
in writing. We are looking for a commitment that you would be 
interested in fixing this issue as it goes forward.
    We have spent the last 3 hours, more than the last 3 hours 
talking about the Volcker Rule and the tremendous amount of 
time that your respective agencies put into developing the 
rule: 932 pages; 297,000 words.
    Mr. Curry, Mr. Gruenberg, GAO's report regarding 
proprietary trading notes, ``Staff at the financial regulators 
and the financial institutions we interviewed also noted that 
losses associated with lending and other risky activities 
during the recent financial crisis were greater than losses 
associated with stand-alone proprietary trading. For example, 
one of the firms reported increasing the reserves it maintains 
to cover loan losses by more than $14 billion in 2008, and 
another of the firms increased its loan loss reserves by almost 
$22 billion in 2009. Further, FDIC staff, whose organization 
oversees bank failures, said they were not aware of any bank 
failures that had resulted from stand-alone proprietary 
trading.''
    Did any of the 450 banks that failed during the crisis fail 
because of proprietary trading?
    Mr. Gruenberg. On the failure issue, we have had actually 
492 since 2008. I don't know that you can identify proprietary 
trading as the cause of failure.
    Just to shed light on the issue, I think the activity of 
proprietary trading is really largely a function of the very 
large institutions, and those were not the ones, frankly, among 
the 492, and that may be part of the issue here.
    But to directly answer the question, it is true, of the 
institutions that failed, we wouldn't identify proprietary 
trading as the cause, but I am not sure that is really the key 
question here, because it is the concentration of the activity 
among the larger institutions that I think is what would need 
to be examined.
    Mr. Rothfus. Again, but the Volcker Rule is aimed at 
proprietary trading. And we went through the crisis, and not 
one of these banks failed because of proprietary trading. Isn't 
that true?
    Mr. Gruenberg. Yes.
    Mr. Rothfus. Yet we know that these institutions are still 
going to be able to take positions in GSE paper, Fannie paper, 
Freddie paper, municipal securities, as the chairman mentioned, 
Detroit, Puerto Rico. Is it fair to say that at least with 
respect to the Volcker Rule, the largest banks will still be 
able to take risky bets backed by the taxpayers on these 
exempted securities?
    Mr. Curry. From a large bank supervision standpoint--I 
think Governor Tarullo mentioned this earlier--we are going to 
be looking at the issue even more broadly in terms of whether 
their direct activities other than market making or 
underwriting, things that occur inside the bank, that they are 
done in a safe and sound manner, that there are appropriate 
risk-management controls in place, which is a little bit 
different than the approach with the Volcker Rule.
    Mr. Rothfus. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The apparent last questioner is the gentleman from Ohio, 
Mr. Stivers. He is now recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    I would like to thank all of you for your patience and for 
being willing to sit through tons and tons of questions. I have 
a few questions. A lot of mine are follow-ups, because when you 
go last, you get to follow up on a lot of other people's 
questions.
    I do want to make a quick plug for something that Mr. 
Scott, Mr. Garrett, Mrs. Maloney, and Mr. Barr talked about on 
CLOs. I do believe that including CLOs doesn't reflect 
congressional intent and could have really disruptive and 
avoidable impacts on businesses that use CLOs to obtain 
financing and create jobs, and I would ask all the regulators 
to take a serious look at whether the grandfathering that Mr. 
Barr suggested or some other clarity for folks who already own 
these CLOs.
    We are changing the rules in the middle of the game. 
Hopefully, you are all willing to take a look at that issue, 
because I think it could have a major negative impact on jobs 
and on a lot of these companies that have used these to finance 
jobs. So I guess, raise your hand if you are willing to take a 
serious look at those issues and grandfathering and whether 
there are solutions. Thank you. I will take that as unanimous 
agreement. I really appreciate that.
    The first question I have is for Mr. Tarullo with regard to 
private equity, and so this is kind of a follow-up on what Mr. 
Rothfus just asked. But I am hearing a lot of concern around 
the definition of illiquid funds from the Federal Reserve, that 
a lot of folks believe that they won't be able to have access 
to the 5-year extension that could be granted to them because 
of the definition of illiquid funds. And I guess I am curious 
if you would be willing to take a look at that and its impact 
on the ability of folks to keep their capital or being forced 
to sell at a fire sale.
    Mr. Tarullo. Sure. I am happy to take any comments from 
people raising issues about it.
    Mr. Stivers. Have you considered or did you consider in the 
Volcker Rule with regard to private equity investments made 
prior to May of 2010, which is the cutoff date for the Volcker 
Rule, allowing some kind of grandfathering even up to, say, 3 
percent of Tier 1 capital? Was that even something that was 
discussed or is it something that should be looked at?
    Mr. Tarullo. I don't recall any discussion of that, 
Congressman. I think that it was more of a decision as to when 
to put a cutoff date that--
    Mr. Stivers. I would just urge you--maybe there should have 
been and maybe there still should be--so I would ask you to go 
back and take a look at that and capping that. Even if you cap 
it at some percent, these private equity investments have many 
of the same criteria of the loans that these banks make, and 
especially in the middle market, it is a big impact on a lot of 
these companies.
    My next question is for Ms. White. I want to shift a little 
bit to the municipal advisory rule. It is my understanding that 
the municipal advisory rule that was drafted was really 
intended to cover unregistered municipal advisors. Was that 
really the intent of that rule?
    Ms. White. That was certainly the core.
    Mr. Stivers. And so it troubles me that the way it is 
written, it requires issuers to hire a municipal advisor for 
every deal unless they do one of two things: put out an RFP; or 
sign a letter of engagement with a broker-dealer.
    I have the Ohio State University, which is partially in my 
district, and partially in Mrs. Beatty's district. They are 
pretty sophisticated. They don't want to have to hire a 
municipal advisor for every action, and it just creates an 
extra hassle for them and extra burdens and it forces them to 
sign a letter of engagement when they are pretty sophisticated. 
I guess I would ask you to take a look at that provision as 
well.
    Ms. White. Yes. And I think we recently, in January, put 
out a number of answers to some questions, I am not sure about 
that one, but we also recently stayed the effectiveness of the 
registration to July 1st, and obviously we can consider any 
other questions.
    Mr. Stivers. I really appreciated that. And I have asked 
Chairman Garrett to see if we could have a panel on that 
subject sometime between now and May to help give you some 
advice from us.
    The last thing I wanted to talk about is--and I know this 
has been hit on by many other people, Ms. Maloney and others--
so who here thinks, raise your hand if you think having one 
lead regulator for issues like the Volcker Rule, where there 
are five agencies collaborating, makes sense. Does anyone think 
it makes sense to have a lead, at least one lead?
    Okay. If you don't think it makes sense, could we go down 
the line and each one of you tell me how we deal with conflicts 
where you have different interpretations of the same rule, 
because unless you have one person in charge--I am a military 
guy--nobody is in charge. So I would love to hear how you think 
we should deal with conflicts.
    Mr. Tarullo. Congressman, I think this is the statutory 
scheme that we have been given, not just with respect to 
Volcker, but more generally. That is, we each have independent 
responsibility, we all try to be cooperative and accommodating 
to one another. But again, I don't think anybody is in a 
position to cede and say that Chair White is the ultimate 
decision maker of things that go on in national banks. It is an 
artifact of the system that has advantages, but it is also has 
some disadvantages.
    Chairman Hensarling. Fortunately for the panel, the time of 
the gentleman, and of all of the ladies and gentlemen, has 
expired. The Chair, though, does want to follow up with one 
request. The gentleman from New Jersey, Mr. Garrett, had made a 
request. Clearly, you have noticed a lot of concern about 
liquidity in the corporate bond market within this hearing. 
And, in fact, Chair White, I think your Division of Investment 
Management has also echoed a concern.
    The request was made by Chairman Garrett that your working 
group report on the status of liquidity in the corporate bond 
market on at least a quarterly basis. I don't think I gave him 
an opportunity to receive an answer from you, but I want to 
repeat that request. I would love an oral answer of yes, no, or 
maybe.
    Governor Tarullo?
    Mr. Tarullo. Maybe. And we will give it to you in writing, 
Mr. Chairman, you and Chairman Garrett.
    Chairman Hensarling. Starting out with one ``maybe.'' Just 
for the benefit of the panel, if we don't hear ``yes,'' I can 
guarantee you that you will get another invitation to testify 
before the committee in the next quarter. Maybe that will help 
color your answer, Chair White.
    Ms. White. It doesn't really change my answer. We will 
discuss it and get back to you.
    Chairman Hensarling. I'm sorry?
    Ms. White. I said we will take it up--
    Chairman Hensarling. Okay. So that is two ``maybes.'' You 
can be a trendsetter here, Mr. Curry.
    Mr. Curry. I think I am a ``maybe.''
    Chairman Hensarling. Three ``maybes.''
    Mr. Gruenberg. We need to look at it and get back to you.
    Chairman Hensarling. Four ``maybes.''
    Mr. Wetjen. I think the only thing I would add is I think 
probably the whole group would like to get to something in 
terms of what is being requested, but we just have to work 
through whatever obstacles there might be.
    Chairman Hensarling. You will get a formal request to get 
this information to the committee on a quarterly basis if it is 
not forthcoming. It is something terribly important. We will 
have another hearing within the next quarter.
    But I do want to thank all of the witnesses for your 
testimony today, and I want to thank you for your patience.
    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 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    [Whereupon, at 1:31 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            February 5, 2014


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