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





                   THE GROWTH OF FINANCIAL REGULATION
                           AND ITS IMPACT ON
                     INTERNATIONAL COMPETITIVENESS

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 5, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-69




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]









                         U.S. GOVERNMENT PRINTING OFFICE 

88-531 PDF                     WASHINGTON : 2014 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Printing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001


















                 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              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
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
              Subcommittee on Oversight and Investigations

              PATRICK T. McHENRY, North Carolina, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      EMANUEL CLEAVER, Missouri
PETER T. KING, New York              KEITH ELLISON, Minnesota
MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
SEAN P. DUFFY, Wisconsin             CAROLYN B. MALONEY, New York
MICHAEL G. GRIMM, New York           JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
DENNIS A. ROSS, Florida              DENNY HECK, Washington
ANN WAGNER, Missouri
ANDY BARR, Kentucky






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 5, 2014................................................     1
Appendix:
    March 5, 2014................................................    25

                               WITNESSES
                        Wednesday, March 5, 2014

Barr, Michael S., Professor of Law, University of Michigan Law 
  School.........................................................    10
Bennetts, Louise C., Associate Director of Financial Regulation 
  Studies, the Cato Institute....................................     5
Hillel-Tuch, Alon, Co-Founder and Chief Financial Officer, 
  RocketHub......................................................     6
Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy 
  Studies, the American Enterprise Institute.....................     8

                                APPENDIX

Prepared statements:
    Barr, Michael S..............................................    26
    Bennetts, Louise C...........................................    32
    Hillel-Tuch, Alon............................................    46
    Wallison, Peter J............................................    60

              Additional Material Submitted for the Record

McHenry, Hon. Patrick:
    Written statement of the National Association of Federal 
      Credit Unions (NAFCU)......................................    74
    Written statement of the U.S. Chamber of Commerce............    78
Green, Hon. Al:
    Written statement of Professor Chris Brummer, J.D., Ph.D., 
      Georgetown University Law Center...........................    80

 
                         THE GROWTH OF FINANCIAL
                      REGULATION AND ITS IMPACT ON
                     INTERNATIONAL COMPETITIVENESS

                              ----------                              


                        Wednesday, March 5, 2014

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:02 p.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the subcommittee] presiding.
    Members present: Representatives McHenry, Fitzpatrick, 
Barr, Rothfus; Green, Cleaver, Sinema, Beatty, and Heck.
    Chairman McHenry. This hearing of the Subcommittee on 
Oversight and Investigations will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    I want to welcome our witnesses and members. This hearing 
is entitled, ``The Growth of Financial Regulation and its 
Impact on International Competitiveness.'' The purpose is to 
examine the impact of increasing regulations on U.S. financial 
institutions and markets, as well as to evaluate whether 
differences between domestic and foreign regulations create 
competitive disadvantages and decrease the attractiveness of 
U.S. financial markets.
    I will now recognize myself for 5 minutes for an opening 
statement. For a century, American dominance in the financial 
services industry has proven vital to the strength of our 
national economy. Through the Great Depression, the Great 
Recession, and many ups and down in between, American supremacy 
in this sector has provided access to capital and economic 
freedoms that other nations can only aspire to create. And yet, 
it should not be taken for granted. We live in an extremely 
competitive and dynamic global marketplace, and the United 
States faces a period of rising regulation.
    In the course of implementing the Dodd-Frank Act and Basel 
III rules, U.S. regulators have imposed and continue to impose 
regulations that will undoubtedly constrain banking and 
financial services. This hearing will examine both the 
cumulative impact of these regulations and the extent to which 
differences between domestic and foreign regulatory regimes 
have made it more difficult for U.S. financial institutions to 
compete. In remarks before the International Monetary 
Conference in June 2011, then-Treasury Secretary Timothy 
Geithner explained why Congress and financial regulators needed 
to consider the competitiveness of U.S. financial markets.
    He said, ``We live in a global financial marketplace with 
other financial centers competing to attract a greater share of 
future financial activity and profits.'' The divergence of 
regulation across borders, however, creates the risk of 
regulatory arbitrage, in which financial institutions and 
markets direct resources and locate their activities to 
minimize the cost of regulation. As U.S. regulators continue to 
implement the Dodd-Frank Act, including the Volcker Rule, and 
set capital and liquidity requirements that exceed the Basel 
III recommendations, other countries have been slow to adopt 
similar rules or have refused to adopt them at all.
    Given advances in communications technology, financial 
institutions are looking outside the United States to avoid the 
burdens of U.S. regulation. As policymakers, we need to be 
aware of that. Because U.S. financial institutions are in the 
process of building the compliance structures necessary to 
comply with hundreds of new rules, the aggregate cost of all 
these rules cannot be quantified. Because regulators have 
refused to undertake cost-benefit analyses for these new rules, 
estimating their cost is difficult. Nonetheless, these 
regulatory burdens will impose costs in the form of anemic 
economic growth and weak job creation.
    In a world in which capital knows no boundaries and 
competition is global, the extent to which new financial 
regulations impose greater burdens on U.S. firms and financial 
markets relative to Europe, Asia, and other advanced economies 
will further harm the U.S. economy as foreign banks and capital 
markets grow at our expense. Now, we have to talk about the 
regulation within our regime and what we can control. That is 
what this hearing is about. Overregulation extends to all areas 
of finance, even those intended to help small entrepreneurs 
seeking to raise capital through crowdfunding.
    Rather than helping these entrepreneurs access a new source 
of capital, the regulations issued by the Securities and 
Exchange Commission require these small businesses to comply 
with a proposed rule that was so complicated that it required 
568 pages for the SEC to explain it. This is unacceptable. As 
the United States awaits a final rule from the SEC, European 
securities-based crowdfunding has been permitted to operate 
under a much more reasonable regulatory framework that is 
continually expanding. Other opportunities in Asia are already 
existent. We are slow to catch up when it comes to 
crowdfunding.
    As it stands today, the United States is a net importer of 
capital and a net exporter of financial services. And yet, the 
United States' financial services faces a period of rising 
regulation that could threaten this advantage. Financial 
regulators implementing Dodd-Frank in international courts have 
imposed, and continue to impose, regulations to prevent our 
constrained banking and financial services in virtually all of 
its capacities. As we continue down this path it is imperative 
that we view the regulatory costs and burdens in a larger 
global context. That is how the capital markets view it, and as 
policymakers, that is how we must view it.
    I look forward to hearing from our witnesses today, and the 
questions our Members have, and I know that we can benefit from 
the broad expertise of this panel.
    With that, I will now recognize the ranking member of the 
subcommittee, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I also thank the 
witnesses for appearing this afternoon.
    Mr. Chairman, America has long been a leader within our 
global community. Many look to us and see a land of 
opportunity, where hard work and persistence can mean a better 
life. Many more view our great Nation as an economic superpower 
whose leadership is central to the success of the entire global 
economy. The question of whether America should lead or be led 
is one that we in Congress confront daily. And I am confident 
that no Member of Congress believes that America should follow 
when our leadership is needed.
    This is why, when the question of American competitiveness 
in the global economy is raised in the context of regulatory 
reform, I do not oppose a thorough discussion that considers 
many points of view. Such a discussion should include, at 
minimum, some laconic indication as to why a global economic 
meltdown was imminent, how it was avoided, and what was done to 
avoid a recurrence.
    Why was the global meltdown imminent in 2009? Among many 
reasons advanced were a lack of regulatory structure, such that 
risky products gained global acceptance, significant capital 
quality was poor, risk-based capital ratios of too many huge 
corporations were too low, countercyclical capital was too low, 
leverage ratios of many significantly significant financial 
institutions were too high, liquidity standards were generally 
inadequate among some major financial institutions, and capital 
standards for many systemically significant financial 
institutions were insignificant or insufficient.
    The conditions led to a circumstance wherein capital was 
frozen to the extent that banks would not lend to each other, 
and FDIC coverage had to be increased from $100,000 to $250,000 
to maintain depositor confidence.
    How was the global meltdown avoided? When the markets 
nearly collapsed, costing an estimated $13 trillion in economic 
output, countries were devastated as the housing bubble burst. 
The U.S. Government took unprecedented steps to avoid a global 
economic depression by supporting American financial 
institutions critical to the global markets, extending over $1 
trillion in support, including an estimated $580 billion in 
liquidity swap blinds for foreign countries, all of which is to 
be repaid.
    Now, what was done to avoid a recurrence? The codification 
and passage of Dodd-Frank--this legislation deals with too-big-
to-fail taxpayer bailouts--indicates America's leadership, and 
this is a great piece of legislation that was passed. Many 
other countries have followed suit and have begun considering 
their own similar regulatory efforts.
    Mr. Chairman, I believe--I have always contended and 
believed that we should amend Dodd-Frank, not end it. 
Legislation of this magnitude is rarely perfect, and I believe 
that we must do all that we can to avoid unintended 
consequences. However, I also believe that Dodd-Frank was, and 
is, necessary. Important evidence of the necessity for Dodd-
Frank is the fact that Congress passed Dodd-Frank in this time 
of a divided Congress. As I mentioned earlier, any analysis of 
American economic competitiveness merits a thorough discussion. 
It is important for the record to reflect that much of Dodd-
Frank's rulemaking has not been finalized. Further, it is also 
important to note that many times, our Federal regulators have 
amended the rules when the public and Congress has raised 
concerns.
    The Basel III framework was originally agreed upon in 2010. 
However, the provisions of the agreement are still being 
implemented, and some are scheduled to come online as late as 
2019. In addition, other important regulatory rulemakings have 
not been finalized at this time, and we should consider their 
impacts as I am concerned it may be premature, at this time, to 
draw final conclusions on rules that are far from final without 
evidence of an adverse impact.
    The SEC is woefully underfunded, to the extent that 
mission-critical capacity may be compromised. This is why, in 
part, I support the President's requested amount, and believe 
that in so doing, in funding the SEC, we might engender greater 
progress and stronger enforcement, which means better investor 
protection. When we comport with the belief that regulatory 
reform places America at a competitive global disadvantage, we 
expose ourselves to the risk of a great irony: there will 
always be the fear of failing, or falling behind the innovation 
curve. That is what has led to the new regulations and has 
caused us to turn a blind eye to securities markets that caused 
a great downturn and that we still do not fully understand.
    America must lead. We did this with Dodd-Frank, and we must 
expect the same from our global counterparts as they work to 
strengthen their regulatory frameworks.
    I look forward to hearing from our witnesses, and I thank 
you, Mr. Chairman. I yield back the balance of my time.
    Chairman McHenry. We will now recognize our distinguished 
witnesses. I will introduce the panel, and then we will begin 
and go in order here.
    First, Louise Bennetts is the associate director of 
financial regulation studies at the Cato Institute. She focuses 
on the impact of financial regulatory reform since 2008, 
including attempts to address too-big-to-fail and the impact of 
cross-border regulatory initiatives on financial stability and 
global capital flows.
    Second, we have Alon Hillel-Tuch, the co-founder and CFO of 
RocketHub, which is a rapidly expanding online crowdfunding 
portal. He was previously a special situations manager at BCMS 
Corporate.
    Third, Peter J. Wallison is co-director of the American 
Enterprise Institute's program on financial policy studies. 
Previously, as General Counsel to the U.S. Treasury Department, 
he had a significant role in the development of the Reagan 
Administration's regulatory reforms in the financial services 
marketplace.
    And finally, Michael Barr is a law professor at the 
University of Michigan Law School. He was previously on leave 
in 2009 and 2010, serving as the Treasury Department's 
Assistant Secretary for Financial Institutions. He was very 
involved in the development of the Dodd-Frank Act during that 
time, as well.
    Now, for those of you who are well-acquainted with this, 
you understand the lighting situation we have here in Congress. 
As Members of Congress, we need very simple rules of the road. 
And so green means go, yellow means hurry up, and red means 
stop.
    Without objection, the witnesses' written statements will 
be made a part of the record. And the idea here is for you to 
summarize your written statement in 5 minutes.
    We will begin with Ms. Bennetts.

    STATEMENT OF LOUISE C. BENNETTS, ASSOCIATE DIRECTOR OF 
        FINANCIAL REGULATION STUDIES, THE CATO INSTITUTE

    Ms. Bennetts. Chairman McHenry, Ranking Member Green, and 
distinguished members of the subcommittee, I thank you for the 
opportunity to testify in today's important hearing. As 
Chairman McHenry noted, I am Louise Bennetts, the associate 
director of financial regulatory studies at the Cato Institute, 
which is a non-profit, nonpartisan public policy institute here 
in Washington, D.C.
    Before I begin, I would like to highlight that all comments 
I make and opinions I express are my own and do not represent 
any official positions of the Cato Institute or any other 
organization.
    In the United States, since 2010, we have seen the rollout 
of one of the most comprehensive reform agendas targeting the 
financial services industry. The centerpiece of the reform 
agenda, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, has 394 associated rulemaking requirements, and 
has already spurred thousands of pages of related rules.
    But this is just the tip of the iceberg. As of February 
2014, only 52 percent of the rules required by the Act have 
been finalized. Around 20 percent have yet to be proposed. And 
Dodd-Frank is but one component of a much, much larger 
financial regulatory reform agenda which includes a complete 
overhaul of capital and liquidity rules imposed on the U.S. 
banking sector; a radical revision of the regulation of non-
bank financial companies, such as insurance firms and asset 
managers; changes in the regulation of U.S. operations of 
foreign banks; changes in the regulation of consumer credit; 
and the imposition of new monitoring and enforcement 
obligations on behalf of the Federal Government.
    And all of these obligations are multiplied for banks that 
operate cross-border. In addition, barely a month passes 
without a new financial initiative being proposed either in 
Congress or through the regulatory agencies. While many of 
these proposals will never see the light of day, they 
nonetheless impose a significant cost on the private sector in 
terms of the uncertainty they generate. The question before the 
committee today is, how is this regulatory overhaul impacting 
the global competitiveness of the American financial services 
sector and, indeed, American consumers of financial services?
    To date, no assessment has been made of the cumulative 
impact or cost of all of this regulation. To answer it, in my 
view, we need to address two related issues. The first is, what 
are the individual and cumulative costs? And second, and more 
importantly, are we likely to achieve the desired outcome, that 
is, creating a financial system that is safer and more 
transparent, without damaging credit provisions.
    First, I would like to make a few observations about the 
United States' position in the global economy. As Chairman 
McHenry noted, the United States is a net importer of capital 
and a net exporter of financial services. And despite its 
fragmented regulatory system and its crisis-prone banking 
history, the United States has nonetheless developed the 
world's most vibrant capital markets and currently has the only 
well-developed debt market and short-term or overnight dollar 
funding market. Most foreign companies and banks raise a 
significant portion of their non-depository funding here in the 
United States. Because of this, the United States today has the 
world's reserve currency and is able to finance its significant 
deficits, where other countries have struggled to do so.
    However, while the United States may have had a head start, 
one cannot assume a permanent state of dominance. Steps are 
being taken to develop high-yield and other short-term funding 
markets, particularly in Southeast Asia, as well as in Europe, 
although I note that the European funding markets remain weak. 
In addition to the large European banks, several emerging 
markets, most notably China, are taking noteworthy steps 
towards the creation of worldwide banking conglomerates. Both 
defendants and opponents of the current regulatory reform 
agenda frequently present this issue as a binary choice between 
profitability and competitiveness one hand, and safety and 
stability on the other.
    For the reasons we will discuss today, and as set out in my 
written testimony, I view this as a false dichotomy. The time 
has come to acknowledge that we are at a crossroads globally 
and domestically. One path leads to a system where American 
banks and financial services firms, buckling under the weight 
of excessive regulation, become less diversified, less 
competitive globally, more inward-looking and, in my view, 
potentially more unstable. This path leads to a suboptimal 
outcome, where firms are focused on pleasing regulators rather 
than on market risk and meeting the needs of their consumers.
    Another path begins with the recognition that we really may 
have gone a step too far. The time has come to ask ourselves 
what was the purpose of all of this? If the purpose is to make 
the United States banking sector less crisis-prone, safer, and 
more competitive, we need a comprehensive and realistic 
assessment of whether all these regulations, given their costs, 
are achieving this outcome.
    I thank you for the opportunity to testify today.
    [The prepared statement of Ms. Bennetts can be found on 
page 32 of the appendix.]
    Chairman McHenry. Thank you, Ms. Bennetts.
    Mr. Hillel-Tuch?

 STATEMENT OF ALON HILLEL-TUCH, CO-FOUNDER AND CHIEF FINANCIAL 
                       OFFICER, ROCKETHUB

    Mr. Hillel-Tuch. Mr. Chairman and members of the 
subcommittee, thank you for this opportunity to provide 
testimony. My name is Alon Hillel-Tuch. I am a co-founder and 
chief financial officer of RocketHub. RocketHub is an 
established crowdfunding platform that has initiated over 
40,000 campaigns and has provided access to millions of dollars 
worth of capital for entrepreneurs and small businesses in over 
180 different countries.
    My testimony today is based on my field experience working 
closely with new and small business. Domestic job growth comes 
from the new and small business sector. Approximately 90 
percent of U.S. firms employ 19 or fewer workers, and these 
companies create jobs at nearly twice the rate of larger 
companies. According to January's ADP national employment 
report, between December and January small businesses with 
fewer than 50 employees added 75,000 positions. That is more 
than double the number of jobs large businesses created in the 
same period.
    Job creation is the most prevalent in new companies. And if 
our job goal is to drive job growth within the United States, 
our focus should be on new business formation. The spirit of 
entrepreneurship in the United States is unparalleled and, as a 
result, more Fortune 500 companies exist in the United States 
than anywhere else in the world. Those large companies are 
serviced well by big banks and the public markets. But new and 
small businesses often find it difficult to access capital.
    In the United States, investment capital is mainly limited 
to regions such as New York City, Boston, and Silicon Valley. 
However, most new and small businesses do not have access to 
these capital zones, let alone the innovation hubs recently 
created by the White House. Crowdfunding platforms such as 
RocketHub provide capital access to new and small businesses 
that are either neglected by large banks or face unmanageable 
interest rates due to different risk mechanisms.
    Until recently, the crowdfunding market was allowed to 
evolve and innovate without government oversight. Platforms 
sprouted, and the public quickly adopted this social form of 
capital formation. Equity crowdfunding was the next 
evolutionary step in the market, and the first time Congress 
became involved. The House of Representatives passed several 
bills focused on economic revitalization and democratizing 
access to capital. This became the Jobs Act that the President 
signed into law on April 5, 2012.
    But since then, implementation delays have been 
significant. It took the FCC 566 days to release proposed rules 
for Title III. In the meantime, basic forms of equity 
crowdfunding have been operational for almost 3 years in the 
United Kingdom and the Netherlands, and for nearly 5 years in 
Australia. The United States is a market that is a magnet for 
domestic and foreign entrepreneurs. But they must have the 
necessary tools available within the United States to innovate 
and grow.
    And other countries are actively pursuing these 
entrepreneurs. For example, Chile has a special visa program 
for foreign entrepreneurs that includes a $40,000 grant. And 
they proactively approached RocketHub. They sat down with me to 
discuss leveraging crowdfunding, including equity-based 
crowdfunding, within the Chilean market. I have had similar 
discussions with foreign direct investment agencies in France, 
as well as the Ontario securities commission in Canada. The 
World Economic Forum's global competitive report identifies the 
United States as an innovation powerhouse, yet we rank only 5th 
in competitiveness.
    Certain countries that ranked lower in competitiveness, 
such as the Netherlands (8th) and the United Kingdom (10th) are 
catching up. And they are doing this by being forward-thinking 
market innovators, encouraging new capital formation policies 
such as equity-based crowdfunding, well in advance of the 
United States. This is not a brand-new market. It is a market 
that has been in existence for awhile. And it has its wings 
clipped in the United States by overregulation. This is an 
important economic tool that helps small and young businesses 
grow, which will drive job creation.
    And if it is not allowed to continue to develop in the 
United States, the market will ultimately continue to develop 
outside this country. The Jobs Act, and Title III in 
particular, was intended to mandate low-cost regulation that 
relied on individuals within the marketplace and their 
socially-informed investment appetite. However, it has evolved 
into a high-cost solution relying heavily on frameworks 
developed over 80 years ago.
    At this point, legislative support is needed to assist the 
Securities and Exchange Commission in creating functional rules 
for Title III. Checks and balances within emerging markets are 
critical not only for consumer protection purposes, but also to 
generate trustworthiness in the market. I believe appropriate 
regulation, leveraging a soft yet informed approach, is 
crucial. With congressional support, we can increase the 
economic benefit provided by crowdfunding and remain 
competitive in the international market.
    The current market dynamics abroad, demonstrated by 
countries such as Canada, the United Kingdom, the Netherlands, 
Australia, Italy, and now New Zealand make it clear that only a 
proactive approach in ensuring functional regulation will 
enable the United States to maintain a dominant international 
position for new and small businesses. I hope to have the 
opportunity to elaborate further on key provisions.
    And I thank you for your time.
    [The prepared statement of Mr. Hillel-Tuch can be found on 
page 46 of the appendix.]
    Chairman McHenry. Thank you.
    Mr. Wallison?

   STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN 
  FINANCIAL POLICY STUDIES, THE AMERICAN ENTERPRISE INSTITUTE

    Mr. Wallison. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, my testimony today will focus on a 
different aspect of financial regulation and competition: the 
competition between banks and non-bank financial firms, what 
bank regulators call ``shadow banking.'' This needs much more 
attention from Congress. Under the Dodd-Frank Act, the 
Financial Stability Oversight Council (FSOC) has the authority 
to designate any financial firm as a systemically important 
financial institution (SIFI) if the institutions's financial 
distress will cause instability in the U.S. financial system.
    Non-bank financial firms designated as SIFIs are then 
turned over to the Federal Reserve for what appears to be 
prudential bank-like regulation. The troubling extent of the 
FSOC's authority was revealed recently, when it designated the 
large insurer, Prudential Financial, as a SIFI. Every member of 
the FSOC that was an expert in insurance and was not an 
employee of the Treasury Department dissented from the 
decision, arguing that the FSOC had not shown that Prudential's 
financial distress would cause instability in the financial 
system.
    Virtually all other members, knowing nothing about 
insurance or insurance regulation, dutifully voted in favor of 
Prudential's designation. Indeed, there was little data in the 
document that the FSOC issued in support of its decision. The 
best way to describe the decision is perfunctory. There is a 
reason for this. In effect, the decision on Prudential had 
already been made before the FSOC voted. The previous July, the 
Financial Stability Board (FSB), an international body of 
regulators, empowered by the G20 leaders to reform the 
international financial system, had already declared that 
Prudential was a SIFI.
    The FSOC's action was simply the implementation in the 
United States of a decision already made by the FSB. Since the 
Treasury and the Fed are members of the FSB, they had already 
approved its July action. This raises a question of whether the 
FSOC will be doing a thorough analysis of whether financials 
firms are SIFIs, or simply implementing decisions of the FSB. 
This is important because the FSB looks to be a very aggressive 
source of new regulation for non-bank financial firms.
    In early September, it said that it was looking to apply 
the ``SIFI framework,'' as it called it, to securities firms, 
finance companies, asset managers, and investment funds, 
including hedge funds. These firms are the so-called ``shadow 
banks'' that regulators want so badly to regulate. But it will 
be very difficult to show that these non-bank firms pose any 
threat to the financial system. For example, designating large 
investment funds as SIFIs would be a major and unwarranted 
extension of bank-like regulation. Collective investment funds 
are completely different from the banks that suffered losses in 
the financial crisis.
    When a bank suffers a decline in the value of its assets, 
as occurred when the mortgage-backed securities were losing 
value in 2007 and 2008, it still has to repay the full amount 
of the debt it incurred to acquire those assets. Its inability 
to do so can lead to bankruptcy. But if an investment fund 
suffers the same losses, these pass through immediately to the 
fund's investors. The fund does not fail, and thus cannot 
adversely affect other firms. Asset management, therefore, 
cannot create systemic risk.
    Nevertheless, right after its Prudential decision, and 
following the FSB's lead, the FSOC now seems to be building a 
case that asset managers of all kinds should also be designated 
as SIFIs and regulated by the Fed. It recently requested a 
report from the Office of Financial Research, another Treasury 
body created by Dodd-Frank, on whether asset management might 
raise systemic risk. Not surprisingly, OFR reported that it 
did. Unless the power of the FSOC is curbed by Congress, and 
soon, we may see many of the largest non-bank firms in the U.S. 
financial system brought under the control of the FSOC, and 
ultimately the Fed, and regulated like banks.
    As shown in my prepared testimony, these capital markets 
firms, and not the banks, are now the main funding sources for 
U.S. business. Bringing them under bank-like regulation will 
have a disastrous effect on economic growth and jobs. And this 
outcome could be the result of decisions by the FSB, carried 
out by the FSOC. This is an issue Congress should not ignore.
    I look forward to your questions. Thank you.
    [The prepared statement of Mr. Wallison can be found on 
page 60 of the appendix.]
    Chairman McHenry. Thank you, Mr. Wallison.
    And last, we will hear from Professor Barr.

 STATEMENT OF MICHAEL S. BARR, PROFESSOR OF LAW, UNIVERSITY OF 
                      MICHIGAN LAW SCHOOL

    Mr. Barr. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, I am pleased to appear before you 
today to discuss financial regulation and U.S. competitiveness. 
In 2008, the United States plunged into a severe financial 
crisis, one that shuttered American businesses and cost 
millions of households their jobs, their homes, and their 
livelihoods. The crisis was rooted in unconstrained excesses 
and prolonged complacency in major financial capitals around 
the globe.
    In the United States, 2 years later, the Dodd-Frank Act 
created the authority: to regulate these major firms that pose 
a threat to financial stability without regard to their 
corporate form, and to bring shadow banking into the daylight; 
to wind down major firms in the event of a crisis without 
feeding a panic or putting taxpayers on the hook; to attack 
regulatory arbitrage, restrict risky activities, regulate 
short-term funding, and beef up banking supervision; to require 
central clearing and exchange trading of standardized 
derivatives, and capital, margin and transparency throughout 
the market; to improve investor protections; and to establish a 
new Consumer Financial Protection Bureau (CFPB) to look out for 
American households.
    Since enactment, the CFPB has been built and is helping to 
make the marketplace level and fair. New rules governing 
derivatives transactions have largely been proposed. Resolution 
authority and improvements to supervision are being put in 
place. The Financial Stability Oversight Council has begun to 
regulate the shadow banking system by designating non-bank 
firms for heightened supervision. And regulators have recently 
finalized the Volcker Rule.
    To continue to make progress on reform, the Federal Reserve 
needs to finalize its limits on counterparty credit exposures 
and propose a cap on the relative size of liabilities held by 
the largest firms. It must also continue the reform of REPO and 
other short-term funding at the heart of the financial panic. 
Five years after the money market mutual fund industry faced a 
devastating run, stopped only with a $3 trillion taxpayer 
bailout, we still do not have fundamental reform of that 
sector, with the necessary buffers to prevent a financial 
collapse.
    And we need legislation to determine the ultimate fate of 
the government-sponsored enterprises in a way that protects 
taxpayers, while assuring that the mortgage system works for 
American families. Strong and effective regulation in the 
United States is crucial to a safer and fairer financial 
system, but it is not enough. We also need global reforms. 
Strong capital rules are one key to a safer system. There is 
already double the amount of capital in the major U.S. firms 
than there was in the lead-up to the financial crisis.
    At the same time, globally, regulators are developing more 
stringent risk-based standards and leverage caps for all 
financial institutions, and tougher rules for the biggest 
players. More needs to be done to make resolution of an 
international firm a practical reality. In the United States 
and Europe, further work is needed on implementing structural 
reforms that could reduce risks, improve oversight, and make 
the largest firms more readily resolvable in the event of a 
crisis.
    On derivatives, while much progress has been made, the 
United States remains concerned about whether Europe's rules 
will end up strong enough. And many in Europe worry about 
whether the United States will extend the reach of its rules 
too far. Yet, the global system is moving to a more coordinated 
approach for derivatives that is making a meaningful 
difference. The United States has taken a strong lead in all of 
these efforts, galvanizing the G20 and pursuing global reforms. 
Now is not the time to weaken this global effort.
    In sum, strong U.S. financial rules are good for the U.S. 
economy, good for American households, and good for American 
businesses. We cannot afford to roll back the clock on 
financial reform in the name of U.S. competitiveness. Engaging 
in a race to the bottom is a bad idea for both the United 
States and for the global financial system. We should address 
the current potential for international regulatory arbitrage by 
pushing for more global reforms, not by weakening our own 
standards or exposing our own country to the risks of another 
financial crisis.
    The fact that the United States acted forcefully in 
implementing reforms is good for the United States, ensuring 
that our financial system is more stable and able to weather 
our future financial crises. In contrast, Europe still faces 
serious sources of risk in their financial systems. In Europe, 
its piecemeal approach to reform has led to considerable 
uncertainty that has hurt investment and delayed economic 
recovery. Rather than focusing on how we can lower our own 
standards, we need to focus on continuing to push for global 
reforms so that the risks that could develop overseas do not 
come back to our own shores in a future financial crisis.
    Thank you very much.
    [The prepared statement of Professor Barr can be found on 
page 26 of the appendix.]
    Chairman McHenry. I will now recognize myself for 5 minutes 
for my questions. The success of our capital markets in the 
United States has to do a lot with property rights and contract 
law and certainty of our regime, as well as wise regulation, 
not the absence of regulation, which is a misunderstanding and 
a wrong conclusion of the last financial crisis. There was 
regulation prior to 2008. It did exist. Perhaps it was bad 
regulation that led to some bad outcomes.
    But just to put that as a marker down to this first 
question I have, which is if you look at the world and the flow 
of capital around the world, Ms. Bennetts, is there a rapid 
increase in financial regulation? And is that rapid increase of 
regulation having an effect on the flow of capital in the 
world? Is that a proper understanding, that regulation and 
capital have some linkage?
    Ms. Bennetts. Yes, and certainly--I think that the most 
recent sort of noteworthy study on that was undertaken by the 
McKinsey Global Institute. They brought it out, I think, in 
about March of last year. And what they have said is that since 
the crisis, since about 2007, I think, global capital flows 
have declined about 60 percent. Some of that has to do with the 
crisis in Europe, which I think is an issue of government data 
and placing the banking sector in an extraordinarily difficult 
position. And that is a separate issue.
    But a lot of it also has to do with the fact that following 
a crisis, the natural tendency of regulatory authorities, 
wherever they may be, is to look inward and to put barriers, 
and it is sort of a process, which I think is frequently 
referred to as ``balkanization.'' And that makes the local 
sector far more insular and far more inward-looking. That is a 
problem because it has a real cost for the flow of capital.
    And one other thing I would say about that is, you often 
hear or you read in pieces that people say it almost sounds 
like these flows are a bad thing, that it is a bad idea to have 
capital flowing across borders. But in fact, the crisis would 
have been far, far worse in 2008 if we didn't have the free 
flow of movement across borders. So that was actually, for the 
United States, a very big and important--
    Chairman McHenry. But there is a--everyone is talking about 
Europe here when they testify--financial regulators in the 
United States are testifying about European movements and 
perhaps following in a similar direction, as we have in our 
regime. But isn't it, in fact, the case that with three of the 
world's largest banks being Chinese, there is a movement in 
Asia to go a different direction in terms of regulation?
    Ms. Bennetts. First of all, Europe is an interesting case. 
Because, for example, if you take a recent initiative--and I 
will use one that is in both countries--the Volcker Rule, 
right? The Volcker Rule came out in the United States and it 
is, as we know, a mammoth undertaking. It is a very complex 
rule that spans hundreds of pages. There is a lot of 
micromanaging within the rule, a lot of ongoing enforcement and 
monitoring.
    And when you look at the way that the Europeans have 
approached it, they have released a similar rule recently. But 
theirs is more sort of a principal-based approach. They come 
out and say, ``We would prefer that you didn't do this 
proprietary trading that has no client benefit, but we are not 
really going to institute ongoing and expensive monitoring and 
enforcement type requirements.'' So I would argue that is a lot 
less burdensome for the institutions which are following it.
    That has been a consistent approach that they have adopted. 
They certainly have a very different approach in Asia, 
certainly in Hong Kong and Singapore, which is where the main 
markets are, you don't see the same level of regulation. They 
want high capital, but they don't have the same level of 
micromanagement.
    Chairman McHenry. Mr. Hillel-Tuch, about crowdfunding, I 
authored that section of the Jobs Act that has a regime so that 
we can have low-dollar equity raising online. You have done a 
study on what those 568 pages have--the cost structure on a 
crowdfunding raise. Do the regulations have a bearing on the 
costs of raising money through crowdfunding?
    Mr. Hillel-Tuch. Yes. It took a long time to read through 
all those pages. It was quite cumbersome to do, and 
unfortunately I have had to do it a few times due to 
inconsistencies. But we did an analysis which I included as a 
chart in my written testimony that you are free to take a look 
at. But there are friction points created within the regulation 
that basically allow for up to 50 percent of the money raised 
going towards overhead and compliance costs. So what happens 
is, you have an act that, instead of becoming a reform act or 
an innovation act becomes a regulatory act with regulatory 
friction points.
    Some of them have to be changed, and that is only something 
that could be done with congressional support. Some of them can 
be changed at the discretion of the SEC, with proper support 
given by not just Congress but other people, as well. It is 
quite significant when you are a small business owner and you 
are facing up-front costs that can easily go over $30,000 
without any kind of a guarantee that you are going to receive 
the capital you raised. And that is a significant debt people 
should not bear.
    Chairman McHenry. My time has expired.
    We will now recognize Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. When I played 
football, we lived for the moment of getting a running back or 
a wide receiver out in the middle of the field, putting your 
helmet into him, and hearing the crowd go, ``Ooh.'' That was 
delicious. It has been outlawed; you can't do it anymore. You 
can't even trip anyone anymore. Tripping used to be one of the 
best things going, but you can't trip, they won't let you trip 
anymore.
    And you can't even--you have to pamper the quarterback. You 
have to go in and say, ``Sir, is it okay if I hit you?'' There 
are all of these new regulations imposed on these football 
teams. And every winter, there is a committee of owners who 
meet to consider new regulations. I traveled with the Kansas 
City Chiefs playing in Tokyo, actually twice. They played in 
Mexico, and then London. Sellouts. And there is a great market 
for all of the memorabilia that you buy for the Chiefs and the 
Giants and the Cowboys all over the world.
    In Canadian football, which is similar to American 
football, they constantly look at what we are doing in the 
United States to make decisions on what they are going to do in 
Canada. We don't alter the American rules to accommodate what 
the Europeans or the Africans or Asians are doing in what they 
call football, which we call soccer. Football is still the 
number one sport in the world economically, just like the 
United States is. And there is simply no reason for the NFL to 
abandon rulemaking and regulations, because they are making the 
game safer.
    And I am wondering what is wrong with trying to make the 
game safer, as we are talking about the economics of the United 
States. I was here with Mr. McHenry and Mr. Green--I guess we 
may now be the only three who were here on the day that we had 
the economic collapse. I don't ever want that to happen again. 
And to the degree that we can make rules and regulations that 
will prevent it, how many of you don't--who believes that is 
wrong? Anybody else?
    Mr. Barr. I think you are right, Mr. Cleaver. I think that 
we need to have strong rules of the game that make the system 
safer and fairer for American families and businesses, and that 
make us have a strong and vibrant financial system. And I think 
we are on the right path to do that.
    Mr. Cleaver. Mr. Wallison?
    Mr. Wallison. I would like to point out that there are, as 
the chairman suggested, bad regulations. And one of them is the 
Basel regulations, I, II, and III.
    Mr. Cleaver. Basel II?
    Mr. Wallison. Beginning with the different risk weights 
that were put on assets, and as a result, the capital cost was 
much cheaper for banks to buy mortgage-backed securities. They 
did this in vast numbers because they were only required to 
hold 1.6 percent capital for mortgage-backed securities but 8 
percent capital for perfectly good corporate securities. The 
result of this, of course, was when mortgage-backed securities 
collapsed in 2007 and 2008, banks were hurt very badly.
    In fact, that was the immediate cause of the financial 
crisis. So I think we have to be very careful about the kinds 
of regulations that we put in place. Some of them can be 
extraordinarily harmful, and that is one.
    Mr. Cleaver. Yes, I would agree. But what you do is that 
you revisit any of the rules that became an impediment to the 
game, which is not what we are doing. You want to make the 
rules better. The problem is that instead of making the rules 
better, we attack the rules.
    My time has run out, and I didn't even get to basketball.
    Chairman McHenry. I didn't follow you at all. I don't 
follow football or soccer much, but I do follow NASCAR. So if 
you had done that, I would have maybe tracked a little bit--no. 
I appreciate my colleague.
    I now recognize the vice chairman of the subcommittee, Mr. 
Fitzpatrick, for 5 minutes.
    Mr. Fitzpatrick. I appreciated Mr. Wallison's comment that 
the rules, or in this case the regulations, have to be 
thoughtful. They have to be fair, they have to be evenly 
applied, and not just simply cumulative or reactionary. I am 
mainly concerned about the risk of retaliation against the 
United States by foreign regulators, number one. Number two, is 
there a possibility that foreign banks will seek to do business 
with United States firms from abroad?
    And finally, the impact of all of this on jobs here in the 
United States, which as we consider rules and regulations and 
new laws and cumulative laws, we also have to consider and 
weigh carefully the impact of all of this on how it affects 
people here in this country, people at home in our districts, 
those jobs. And I was wondering, Ms. Bennetts, would you be 
able to comment on the question of whether or not--the first 
question, is there a risk of retaliation against the United 
States by foreign regulators?
    Ms. Bennetts. Yes, I think--and Representative Green sort 
of mentioned, I think, in his opening statements about being a 
leader. The United States is a leader in the global financial 
services sector. So what the United States does is important in 
the global economy. And one of the problems, for example, a 
piece of research I have recently done is on the Federal 
Reserve's Foreign Bank Proposal, and the potential impacts of 
that down the road.
    When you undermine your ability to work with foreign 
regulators, and you say, ``We are going to take an approach 
where we are essentially going to ring-fence your operations in 
our country,'' that really opens up the door for those foreign 
regulators to say, ``If you are doing that in your country, we 
don't believe firms can be resolved on a global level. So we 
are going to do the same to your firms in our country.'' And 
that creates a lot of problems, particularly for U.S. 
institutions that operate cross-border. And also for 
institutions or companies, American companies, that use these 
financial services and need the ability to move money and 
services across borders.
    And then further down the road, I think, as I said, the 
United States is in a lucky position today. Because they are 
able to--sort of in a unique position because they have these 
debt markets that aren't developed elsewhere in the world. But 
that is now. And we have seen them move towards developing them 
elsewhere. And so all that will happen is foreign banks that do 
all that business here will move it elsewhere. And that is a 
few years down the road, but it is definitely coming.
    Mr. Fitzpatrick. How about the potential for retaliation by 
foreign regulators?
    Ms. Bennetts. Michel Barnier said, when the first proposal 
of the Fed's rule--this is just the most recent example that 
came out--one of the letters that came into the Federal Reserve 
comment ledgers was from foreign regulators. And they said, 
``We are under pressure. If you do this, we are under pressure 
to do the same thing in our own markets.'' And so, that is a 
big problem. And we will see what happens. It is early days, 
but I think they are likely to retaliate.
    Mr. Fitzpatrick. Mr. Hillel-Tuch, you do business with a 
lot of foreign firms, I assume, from the United States. So what 
is the risk that foreign banks are going to say, we will do 
business with the United States, but from over here?
    Mr. Hillel-Tuch. Yes. What is starting to get interesting 
specifically about some of the points that the other witnesses 
made is, you are looking at banks that are sort of becoming 
incentivized to trade with other foreign banks instead of 
entering the United States at all. And you are going to start 
getting collaboration between different banks who may not even 
want to work with companies such as mine because we are mainly 
affiliated with the U.S. banking system.
    We are seeing that more and more often. Operating in over 
180 different countries, we are on the foreign exchange all the 
time for different currencies, having to move that around 
globally in real time. That is becoming increasingly harder to 
do as people are uncertain about what is happening next. What 
that means for me is, I am starting to have to become more 
selective on what countries I am operating in as a U.S.-born 
firm, and I have to start considering registering in other 
countries as an entity purely because I am being kind of 
hindered in my ability to operate out of the United States.
    Mr. Fitzpatrick. Mr. Wallison, can you address the impact 
on jobs here in the United States of what was just discussed?
    Mr. Wallison. Certainly. I happen to believe that one of 
the reasons that we have had such a slow recovery from the 
financial crisis and from the recession that followed is that 
the regulations that we have placed on the financial system 
have really brought it to its knees, to use the expression that 
is used in other contexts. People in the financial world are 
now quite afraid of interference by the government, charges of 
various kinds by the government, and are unable to understand 
the very complex regulations that they have to face.
    In particular, I think the Basel regulations have become 
enormously complex. It is almost impossible to understand them. 
So, we need a much simpler set of regulations, such as a simple 
leverage ratio for banks instead of this very complex set of 
regulations. They have just gotten worse since Basel I was 
adopted in the 1980s.
    Mr. Fitzpatrick. I appreciate the comments.
    Thank you.
    Chairman McHenry. We will now recognize Mrs. Beatty for 5 
minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member. And thank you to the witnesses for being here today. I 
am trying to wrap my head around this whole crowdfunding issue. 
So let me kind of go back, and maybe Mr. Barr or anyone who 
wants to address it. You will certainly recall that in April 
2012, President Obama signed into law the Jumpstart Our 
Business Startups Act, or the Jobs Act, which was designed to 
spur hiring through relaxed regulations regarding public and 
private companies' ability to raise capital.
    And the Jobs Act was widely supported and received almost 
400 votes from both Democrats and Republicans, who felt that it 
was the right way to improve the economic climate in the United 
States. However, since its passage, the SEC has come under 
scrutiny for having something moving too slowly and creating 
new rules, or for creating rules that were still too 
restrictive. In particular, some have expressed concerns that 
the proposed Title III crowdfunding rules will unduly restrict 
access to private capital, especially when compared with the 
regulations in place in the U.K.
    So with that said, two questions: First, can you speak 
generally about what types of considerations must be addressed 
when creating rules for the new crowdfunding platforms and 
mandatory disclosures?
    Mr. Barr. I would be happy to say a few words about it. I 
think the question is how to get the balance right. And my 
understanding is, the SEC received lots of comments about their 
initial proposal from lots of different kinds of parties: small 
businesses; sites and brokers that were interested in 
participating; and from investors and investor protection 
advocates. And no one was especially happy. So the SEC is going 
to have to, I think, go back and look at the rule and see if 
they can come up with a simpler approach that protects 
investors and also permits efficient raising of funds.
    My understanding is that the U.K. and the E.U. are in the 
midst of reevaluating their current framework, as well, and 
they may make adjustments in either direction on where they 
are. So I think that it is an evolving area; it is a relatively 
new area. And I think getting the balance right is going to be 
really critical.
    Mrs. Beatty. Let me just follow up, because you also used 
the word ``protection.'' Some of the commentators are 
suggesting that the businesses that are most likely to seek to 
raise capital through crowdfunding are the ones with the 
greatest risk of failure. Or they don't have a sufficient track 
record to satisfy the concerns of venture capitalists. How 
would you categorize the level of risk faced by the investors 
who use crowdfunding?
    Mr. Barr. There are significant risks involved in investing 
in new companies. That doesn't mean it shouldn't be done, but 
new companies can be quite risky to invest in, and I think that 
is why it is important, while you are expanding access to these 
sources of funds, to make sure that the information and 
disclosure and protections are there so that investors 
understand the risks that they are taking on and engaging in 
the funding.
    Mrs. Beatty. Have you or any of the panelists had any 
instances of failure by businesses that raised capital through 
crowdfunding?
    Mr. Hillel-Tuch. We have had well over 40,000 campaigns at 
this point. We have had no successful instances of fraud. We 
have had no significant failures. More revampings. A small 
business might have had to change the direction it was looking 
to take, which is expected at an early stage of a company. We 
have seen everything from idea stage all the way to product 
concepts. What is really interesting is that right now, there 
are no upfront costs they have to face in trying out what is 
currently available, which is perk-based crowdfunding.
    What is happening with the Jobs Act, though, because of the 
equity component we have to put in new regulation, which is 
critical. But there are a lot of requirements, in order to 
ensure information is correct. It puts the cost burden directly 
on the small business. So if you are a small business--let's 
say a coffee shop in Kentucky--you really cannot afford, out of 
pocket, $30,000 up front in order to then say, ``I am able to 
raise over $500,000 because I was able to afford an audit,'' 
while maybe you don't even have historical financial 
information to truly audit.
    There are a lot of nonsensical components. The intent was 
great, but the execution of it does not actually make sense at 
the small business level.
    Mrs. Beatty. Thank you.
    Thank you, Mr. Chairman.
    Chairman McHenry. We will now recognize Mr. Barr of 
Kentucky for 5 minutes.
    Mr. Barr of Kentucky. Thank you, Mr. Chairman. I want to 
kind of focus on the issue of contradictory regulatory 
mandates. Has this phenomenon proliferated as a result of Dodd-
Frank? And can you all provide a couple of examples of where 
this kind of avalanche of regulations has contributed to 
regulatory confusion and contradictory regulatory requirements 
imposed on financial institutions?
    Ms. Bennetts. Yes, I definitely think that--so, for 
example, where you have an issue like the Volcker Rule and you 
have several regulatory agencies. This is a big problem in the 
Dodd-Frank Act. And we see the United States has a very 
fragmented regulatory system, as well, which allows for a lot 
of the regulatory arbitrage that we talk about. But Dodd-Frank 
made that problem a lot worse because you have many, many 
agencies that had mandates over the same rules.
    And just for example, it is not exactly an overlapping 
mandate, but the SEC has a mandate over security-based swaps. 
The FTC has a mandate over ordinary swaps. For an entity that 
is trying to put those rules into place, that is an extremely 
high cost. So Dodd-Frank is listed with those kinds of 
examples.
    Mr. Wallison. I think there are other examples in the 
Volcker Rule itself. The Volcker Rule is internally 
contradictory, from my perspective. And that is one of the 
reasons why it took so long for it to be put in final form. The 
Volcker Rule says you cannot engage in prop trading, which 
means that you cannot buy and sell securities--they are talking 
here about debt securities--for your own account. But it also 
says that you can continue your market-making activities and 
your hedging activities. Both of those are extremely important 
for the markets.
    Market-making is vital for the markets because if you want 
to sell a fixed-income security of some kind, there is always a 
very thin market. You may not be able to find a buyer in the 
world at large. You have to go to someone who will actually buy 
your security, or sell you one. This is because of the thinness 
of the market. That is a market-maker. When a market-maker buys 
or sells, it is very difficult to tell the difference between 
what is a market-making activity and what is a prop trading 
activity. And as long as that is true, banks are going to be 
very fearful of engaging in market-making when there is some 
danger that they might be accused of violating the prop trading 
rules.
    Mr. Barr of Kentucky. Mr. Wallison, I think you have 
included in your prepared testimony also, that in addition to 
its role, its mission of identification of a risk to financial 
stability, FSOC is also supposed to coordinate regulation among 
the multiplicity of regulatory agencies. I take it from your 
testimony that FSOC has failed to properly coordinate and limit 
this--the contradiction that we see in a lot of these 
regulations.
    Mr. Wallison. Yes. I don't see any evidence that the FSOC 
has attempted to coordinate. It has attempted to press its own 
views--these are the views of the Treasury Department--on other 
agencies, such as the SEC. But it hasn't attempted to bring the 
agencies together to coordinate policies. At least from the 
outside, it is very difficult to see that is happening.
    Mr. Barr of Kentucky. In my remaining time, let me just 
shift over to something else. A lot of the focus of the hearing 
so far has been on the proliferation of regulations and 
compliance costs. But let me ask the panel just for your views 
on the tendency of financial regulators to circumvent the 
Administrative Procedures Act requirements related to notice 
and comment rulemaking--so-called ``informal rulemaking''--
where there is a requirement of notice and comment. And we see 
this in particular with the CFPB, how they have been governing 
on an ad hoc basis. Not through rulemaking, which kind of sets 
predictable standards before, but instead, after the fact, 
there is kind of ad hoc enforcement actions or guidance where 
notice and comment and the opportunity for regulated parties of 
the consumers to participate in rulemaking is not available.
    Can you all comment on whether or not you are seeing a lot 
of that guidance, informal interpretive memorandum, general 
statements of policy as a means of circumventing rulemaking? 
And what effect does that have on financial markets?
    Ms. Bennetts. That was a phenomenon that we saw after the 
business roundtable decision a couple of years ago, where an 
ACC rule--a proxy rule was overturned by the court. And since 
then, we have been seeing regulatory agencies, especially where 
they are not 100 percent sure that they can do a cost-benefit 
analysis or a full analysis as required by the rules, they 
release guidance. And we saw, actually, to Peter's point about 
the FSOC designation rule, if you looked at the rule it was 
actually a very limited rule, where everything, all of the 
meat, was in the guidance.
    But the guidance was just guidelines, and so you couldn't, 
in fact--and I suppose you could comment on them, but it 
wouldn't really be taken into account because it wasn't part of 
the rule.
    Chairman McHenry. The gentleman's time has expired. And I 
would announce to the committee, with their indulgence, with 15 
minutes to vote on the House Floor just announced, a series of 
votes, with the Members' cooperation we will be able to get 
everyone in before we adjourn for the votes. That would be the 
best thing for the witnesses and for members, as well.
    So we will now recognize Mr. Heck for 5 minutes, followed 
by Mr. Rothfus for 5 minutes, and then finally the ranking 
member, Mr. Green, for his traditional last series here.
    Mr. Heck?
    Mr. Heck. Thank you, Mr. Chairman. And as someone who is to 
the right of the Chair, sitting to the right of the Chair, I am 
an individual who comes to this task believing that, in fact, 
it is possible to overdo it on the regulatory side and to 
stifle competitiveness. You can get them wrong, you can have 
too many, you can make them too complex and the like. But at 
the end of the day, I am fascinated by the pursuit of the right 
balance between competitiveness and stability. I see them as 
values, both worthwhile and often in competition with one 
another.
    And in that spirit, Mr. Wallison, if I can pick on you 
briefly, you said something earlier that fascinated me within 
this paradigm. And I am paraphrasing, but I think accurately 
and in keeping with the spirit of your remark, that regulations 
had brought financial institutions to their knees. What is the 
evidence of that?
    Mr. Wallison. This is a really interesting question. And I 
wish there was more attention paid to it. When economists look 
at the reasons that we are having such a slow recovery from the 
financial crisis, they blame the Fed. And, to some extent, 
people blame the Affordable Care Act. But no one is spending 
time looking at the costs that are imposed on financial 
institutions by regulations. There is a very small paragraph in 
my prepared statement that I would offer to you. And that is an 
article recently in the newspapers about JPMorgan Chase.
    JPMorgan Chase hired 3,000 compliance officers this year. 
They hired 7,000 compliance officers last year. But they are 
cutting their total employment by 5,000 people this year. What 
that means to me is that JPMorgan Chase is now focusing a lot--
not exclusively, but a lot--on the regulations they face. And 
they are calling back into headquarters, or eliminating, the 
people who actually go out and offer financing to business.
    The result of that, of course, is that there is less 
interest in financing, there is less credit going to 
businesses, there are fewer jobs, and much less economic 
growth. However, we don't hear economists who are studying the 
economy focusing on that issue. So I think you have raised an 
important one. We should be looking at the question of the 
regulatory costs not only in dollars, but in terms of what it 
does to people's will and people's interest in hiring others to 
go out and do--
    Mr. Heck. Fair enough, Mr. Wallison. Let the record also 
reflect that we have added jobs in the private sector every 
month for something like 50 months. And more importantly, and I 
think frankly, sir, in absolute stark contrast with your 
assertion, the 6 largest banks in America reported $76 billion 
in profits in 2013--$76 billion. That is $6 billion short of 
their high in 2006, when the housing market was white hot, 
which hardly seems to me to translate--excuse me, sir, my 
time--to being brought to their knees.
    Professor Barr, on the other end of that teeter-totter--and 
I am concerned about both sides--is the stability side. I 
realize you are not an economist, but I would appreciate and 
respect your insight or opinion nonetheless. If we had been at 
full employment last year, economists estimate that we would 
have grown by an additional trillion dollars. And that is not 
full employment in terms of zero; that is full employment as is 
generally accepted. And yet, we are significantly below that 
and have been since the crash.
    Is it not also true that in terms of the issue of wealth 
creation and job creation that if we err too much on the side 
of the teeter-totter for competitiveness without enough regard 
to stability, that we do not just material harm to the economy, 
but structural and--if not permanent long-term, as we certainly 
have experienced in the last 5 years and as we absolutely 
experienced in the many years after the Great Depression onset?
    Mr. Barr. I agree with you. I think that having good, 
strong regulations is good for financial stability and that is 
good for growth.
    Chairman McHenry. The gentleman's time has expired.
    We will now recognize Mr. Rothfus for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman. I would like to talk 
a little bit about the new Basel III requirements and their 
complexities. Specifically, I will go to Ms. Bennetts and Mr. 
Wallison. So if you could--as I give you the background here. 
The new Basel III capital requirements introduce enormous 
complexity to the capital structure of banks. Multiple 
protective buffers are included which contain incentives to 
maintain or increase different types of capital.
    The regulators have substantial discretion to dictate how 
much and what type of capital shall be held at what times. 
Furthermore, by maintaining the authority to do change risk 
weights when measuring the risk-weighted assets of a bank, 
banks can be forced in and out of different financial products 
at different times. Given the complexity of the measures of 
assets and capital, the market's ability to determine the true 
capital position of a bank will be thoroughly clouded. The 
uncertainty arising out of the regulators' discretion to modify 
measures of capital and assets will cause a permanent concern 
that will constrain banking business and increase that 
industry's dependence on government.
    It is likely that, given the discretion that regulators 
have provided themselves, regulators will feel greater 
responsibility over a bank's success or failure. Hence, the 
manipulation of these capital and asset variables may occur. 
Ms. Bennetts, given the complexity of the Basel III cap--Basel 
III-based capital requirements, is it more difficult to discern 
the true level of regulatory capital held by a financial 
institution?
    Ms. Bennetts. It is certainly difficult in the sense--I 
think that the banks would release, obviously, their tier one 
capital, and that would be public knowledge and you would be 
able to measure it. But one thing I want to add to that is that 
the problem with a risk-weighting system and, more importantly, 
a risk-weighting system where everybody uses the same model--
this isn't a bank's internal risk model that it has kind of 
come up with of its own markets evaluations, everybody is using 
the same model--is that you have increasing asset concentration 
in certain pools of assets.
    Which, as you correctly noted, are the assets that the 
regulators have determined are safe assets at a given point in 
time. That does not necessarily mean that the bank is better 
capitalized. Because if there is a run on that particular type 
of asset--and we saw pre-2008, as Mr. Wallison mentioned 
earlier--everybody thought that triple-A rated mortgage-backed 
securities were a safe asset. So that is a real problem and a 
real flaw in the risk-weighting system.
    And because of the complexity, and also, you don't just 
have the Basel III capital standards, you also have the 
liquidity coverage ratio and all these other measures of 
stability. Now, I do think banks need to be well-capitalized. 
That is not the argument. The question is, how do you 
capitalize them in a way that doesn't create systemic risk?
    Mr. Rothfus. Mr. Wallison, would you think that this level 
of complexity imposes significant costs and uncertainty on 
financial institutions and on those that invest in them?
    Mr. Wallison. Of course. The more complex regulations are, 
the more attention has to be paid to them by the regulated 
industry. They have to hire more people, they have to hire more 
accountants to do all this work for them. And then there 
becomes, as Louise Bennetts' just suggested, a lot of 
difficulty in people outside trying to understand how the bank 
has put together its capital position. I would suggest that we 
would be much better off if we had a simple leverage ratio for 
all banks, rather than these complex rules that began with 
Basel I and have now gone through Basel II, and Basel III.
    Mr. Rothfus. Would these complex rules be prone to 
manipulation by regulators and subject to substantial political 
pressure?
    Mr. Wallison. That is harder to say. I don't know whether 
regulators would manipulate these things for political 
purposes. But I would say that there is only one way, really, 
to prevent risk in this world. And that is diversification. The 
trouble with regulation is that it tends to make everyone do 
exactly the same thing. And to the extent they are doing the 
same thing, as occurred with the Basel capital rules, they all 
fail at the same time when something happens in the world that 
no one expected. So we have to start looking at the Basel rules 
and other regulations from this perspective, and say--
    Mr. Rothfus. Can you comment on how these capital 
requirements might impact on economic growth?
    Is it the complexity of these regulations?
    Mr. Wallison. It does have an impact on economic growth 
because the banks, then, are pushed into certain areas that 
they have to focus on because they have to comply with the 
regulations. And that starves other areas of the economy from 
receiving adequate amounts of credit. So the economy is shaped, 
in a way, by where the banks are directed to go. I want to 
mention one other thing, and that is we are talking about banks 
all the time. This hearing was about banks.
    The most important funder of the U.S. economy are the 
securities markets and the capital markets. In my prepared 
testimony, there is a chart which shows that the banks are tiny 
in terms of their financing of growth and business in the 
United States. The securities markets are where all the action 
is, and--
    Chairman McHenry. We are going to have to leave it there, 
Mr. Wallison. The gentleman's time has expired.
    The ranking member is now recognized for 5 minutes. And 
with 2 minutes left to vote on the Floor, I will leave it to 
the gentleman to determine when we should leave.
    Mr. Green. I assure you, Mr. Chairman, I will consider the 
time. I would like to ask unanimous consent to place in the 
record the testimony of Mr. Chris Brummer, who was originally 
scheduled to be a witness but could not make it today because 
of the rescheduling.
    Chairman McHenry. Without objection, it is so ordered.
    Mr. Green. Thank you. I will be very terse with this. Mr. 
Wallison, you indicate that bad laws seem to be more of a 
problem than a lack of regulation. Permit me to ask you 
quickly, what bad law could we have repealed such that AIG 
would not have been a liability to the world economy? What bad 
law could we have repealed?
    Mr. Wallison. I don't think AIG did what it did because of 
a bad law, although I don't think--
    Mr. Green. I assume, then, that you do agree that there are 
times when we have to have additional laws?
    Mr. Wallison. Sure.
    Mr. Green. That it is just not a question of repealing bad 
laws.
    Mr. Wallison. Absolutely. Regulation is necessary in some 
respects. It can be overdone, as I suggested.
    Mr. Green. It can be overdone. And do you agree that it can 
be, in the sense of not having enough, underdone? That you can 
have a circumstance where you don't have enough regulation?
    Mr. Wallison. Sure. In principle, you can; you might not 
have enough regulation.
    Mr. Green. All right. And do you agree that we do need some 
way to wind down these systemically--these very huge 
corporations, that we call SIFIs, in the event they become a 
liability to the world economy?
    Mr. Wallison. No, I don't agree with that.
    Mr. Green. Do you think--
    Mr. Wallison. First of all, I don't think we understand 
what SIFIs are--
    Mr. Green. Excuse me, if I may ask quickly because time is 
of the essence. Would you just allow them to go into 
bankruptcy?
    Mr. Wallison. Yes, of course. I would allow large firms and 
small firms to go into bankruptcy. That is the way the market 
works.
    Mr. Green. And do you agree that Dodd-Frank provides 
bankruptcy as a remedy?
    Mr. Wallison. No, it doesn't.
    Mr. Green. You do not agree that Dodd-Frank has bankruptcy 
as a remedy?
    Mr. Wallison. No, it does not.
    Mr. Green. Oh, well, you and I differ. My time has expired, 
and I apologize to you for being abrupt. I will yield back to 
you, Mr. Chairman.
    Chairman McHenry. I thank the ranking member, and I want to 
apologize to the witnesses for when they called votes today. 
But I certainly appreciate your willingness to testify and to 
take Members' questions. I ask unanimous consent to submit for 
the record letters from the National Association of Federal 
Credit Unions and the Chamber of Commerce of the United States 
of America. Without objection, they will be entered into the 
record.
    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.
    I want to thank our witnesses for your testimony, for your 
time, and for your input. And without objection, this hearing 
is adjourned.
    [Whereupon, at 3:18 p.m., the hearing was adjourned.]






                            A P P E N D I X



                             March 5, 2014


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


