    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                          EXAMINING THE IMPACT OF THE

                          VOLCKER RULE ON THE MARKETS,

                             BUSINESSES, INVESTORS,

                                AND JOB CREATORS

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

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON CAPITAL MARKETS,
                           SECURITIES, AND INVESTMENT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 29, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-12

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                      Kirsten Sutton Mork, Staff Director
          Subcommittee on Capital Markets, Securities, and Investment

                       BILL HUIZENGA, Michigan, Chairman

    RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
    LUKE MESSER, Indiana                 BILL FOSTER, Illinois
    BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
    FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
    TOM EMMER, Minnesota                 JUAN VARGAS, California
    ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
    THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    TREY HOLLINGSWORTH, Indiana

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 29, 2017...............................................     1
    Appendix:
        March 29, 2017...............................................    41

                                   WITNESSES
                           Wednesday, March 29, 2017

    Blass, David W., General Counsel, Investment Company Institute...     5
    Jarsulic, Marc, Vice President, Economic Policy, Center for
      American Progress..............................................     7
    Kruszewski, Ronald J., Chairman and Chief Executive Officer,
      Stifel Financial Corporation, on behalf of the Securities and
      Financial Markets Association (SIFMA)..........................     9
    Quaadman, Thomas, Executive Vice President, Center for Capital
      Markets Competitiveness, U.S. Chamber of Commerce..............    11
    Whitehead, Charles K., Myron C. Taylor Alumni Professor of
      Business Law, and Director, Law, Technology, and
      Entrepreneurship Program, Cornell University...................    13

                                    APPENDIX

    Prepared statements:
        Blass, David W...............................................    42
        Jarsulic, Marc...............................................    56
        Kruszewski, Ronald J.........................................    65
        Quaadman, Thomas.............................................    79
        Whitehead, Charles K.........................................   198

                  Additional Material Submitted for the Record

    Huizenga, Hon. Bill:
        Written statement of the National Venture Capital Association   216
        Slides used during the hearing by Republican Members.........   218
        Written responses to questions for the record submitted to
          Ronald J. Kruszewski.......................................   220
    Ellison, Hon. Keith:
        Written responses to questions for the record submitted to
          Marc Jarsulic..............................................   223
    Maloney, Hon. Carolyn:
        Letter to Fed Chair Janet L. Yellen, FDIC Chair Martin J.
          Gruenberg, CFTC Chair Timothy Massad, Comptroller of the
          Currency Thomas J. Curry, and SEC Chair Mary Jo White,
          dated August 29, 2016......................................   227

                          EXAMINING THE IMPACT OF THE

                          VOLCKER RULE ON THE MARKETS,

                             BUSINESSES, INVESTORS,

                                AND JOB CREATORS

                                  ----------

                           Wednesday, March 29, 2017

                 U.S. House of Representatives,
                       Subcommittee on Capital Markets,
                            Securities, and Investment,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Bill Huizenga
    [chairman of the subcommittee] presiding.
        Members present: Representatives Huizenga, Hultgren,
    Stivers, Wagner, Messer, Poliquin, Hill, Emmer, MacArthur,
    Davidson, Hollingsworth; Maloney, Sherman, Lynch, Scott, Himes,
    Foster, Sinema, Vargas, and Gottheimer.
        Ex officio present: Representative Hensarling.
        Chairman Huizenga. The Subcommittee on Capital Markets,
    Securities, and Investment will come to order. Without
    objection, the Chair is authorized to declare a recess of the
    subcommittee at any time.
        Today's hearing is entitled, ``Examining the Impact of the
    Volcker Rule on the Markets, Businesses, Investors, and Job
    Creation.''
        I now recognize myself for 3 minutes to give an opening
    statement.
        This hearing will examine the impact of the Volcker Rule on
    the U.S. capital markets broadly, including its impact, most
    especially, on the liquidity and functionality of the fixed
    income and securitization markets, the ability of U.S. and
    international businesses to finance their operations, and U.S.
    competitiveness and job creation.
        The Volcker Rule, or Section 619 of the Dodd-Frank Act,
    prohibits U.S. bank holding companies and their affiliates from
    engaging in ``proprietary trading'' and from sponsoring hedge
    funds and private equity funds.
        Because of the key role that market making plays in
    ensuring deep, liquid, capital markets, the framers of the
    Volcker Rule sought to exempt market-making activities from the
    coverage of its prohibition on proprietary trading.
        There is just one problem. The line between impermissible
    proprietary trading and permissible market making is virtually
    impossible to draw. As a result, banks are getting out of the
    market- making business for fear of running afoul of the
    Volcker Rule. This is a great detriment to the U.S. capital
    markets, in my opinion.
        The real world implications of the Volcker Rule have been
    higher borrowing costs for job creators, smaller investment
    returns for hard-working families, and less economic activity
    overall because of further regulatory restraints placed on
    already reduced liquidity margins in key fixed income markets,
    including the corporate bond market.
        Recently, both current and former regulators have finally
    conceded that the Volcker Rule is impacting the liquidity of
    corporate debt. Specifically, in December of 2016, staff at the
    Federal Reserve issued a report concluding that, ``The
    illiquidity of stressed bonds has increased after the Volcker
    Rule.''
        Furthermore, former Federal Reserve Board Governor Jeremy
    Stein, who served during the Obama Administration, recently
    published a paper with his fellow Harvard colleagues, and
    concluded that the Volcker Rule should be repealed.
        They note that the Volcker Rule also discourages broker-
    dealer banks from providing liquidity during a market
    correction, and that the Rule creates a significant increase in
    compliance and supervisory costs.
        Market making is crucial to the modern financial system, in
    which companies raise funds by selling equity, bonds, notes,
    and commercial paper.
        Market makers also hold down the cost of credit for
    consumers. Credit card debt and mortgages are often financed by
    being bundled into securities, which are then bought and sold
    in the capital markets. By acting as a market maker for these
    kinds of securities, banks make it cheaper and easier for
    responsible consumers to use their credit cards and obtain
    mortgages.
        From its inception, the Volcker Rule has been a solution in
    search of a problem. It seeks to address activities that had
    nothing, absolutely nothing to do with the financial crisis,
    and its practical effect has been to undermine financial
    stability, rather than to preserve it.
        Hard-working Americans, whether they realize it or not,
    rely on capital markets to save for everything from college to
    retirement. And as their Representatives, we must act to
    eliminate burdensome and unnecessary regulations such as the
    Volcker Rule, to ensure that U.S. capital markets remain the
    deepest and most liquid of all investment so that all investors
    receive the greatest return on their investment. I look forward
    to hearing from our witnesses today.
        The Chair now recognizes the ranking member of the
    subcommittee, the gentlelady from New York, Mrs. Maloney, for 5
    minutes for an opening statement.
        Mrs. Maloney. Thank you. Thank you, Mr. Chairman, for
    calling this very important hearing, and for all of our
    presenters here today. It is a very, very important topic.
        I strongly support the Volcker Rule, and I believe it
    stands for an important principle, that banks should not gamble
    with their customers' money, especially when that money is
    backed by a taxpayer guarantee. We have seen too often in the
    past how that produces a situation where all the profit is
    privately shared, while the risk is borne by the public.
        The Volcker Rule, which was named after a great New Yorker,
    former Fed Chair Paul Volcker, came into effect in July 2015.
    So this is a good time to take stock of how this rule is doing.
    Today I have some data from the Federal Reserve that will shed
    light on how the implementation of the Volcker Rule is going.
        Under the Rule, banks are required to report a series of
    quantitative trading metrics, in other words hard data, to the
    regulators, such as risk levels on each trading desk in order
    to help the regulators identify any prohibited proprietary
    trading or trading for your own account.
        Last August, I sent a letter to five agencies in charge of
    the Volcker Rule, requesting that they provide me with an
    analysis of these trading metrics which they have been
    collecting from the banks since July 2014, over 2\1/2\ years.
    And I ask unanimous consent to place that letter into the
    record.
        Chairman Huizenga. Without objection, it is so ordered.
        Mrs. Maloney. The Federal Reserve has been very helpful
    with my request and has provided me with an analysis of some of
    the data that they collect, so this data is limited to the data
    that the Fed collects. It does not represent any other agency's
    data.
        And I want to share this data with everyone today because I
    think it is important. It is the first hard data we have on the
    Volcker Rule. It is complicated, but it is extremely important.
        As you can see on the screen, the first two charts show
    that risk levels on banks' trading desks have been largely
    steady since the Volcker Rule took effect. All of these big
    downward spikes in the chart represent holidays, like
    Thanksgiving or Christmas, when most markets are closed. So
    this is not something to worry about.
        Importantly, these charts cover two periods of market
    stress. First, the Third Avenue Credit Fund's suspension of
    withdrawals in December of 2015. A headline in Bloomberg back
    then read, ``Third Avenue Redemption Freeze Sends Chill Through
    Credit Market.''
        And second, the China growth scare, when China's economic
    growth suddenly slowed down in January and February of 2016. A
    headline in Forbes at that time asked, ``Should Markets be
    Scared?''
        The charts show that the banks did not pull back from the
    markets during these two periods. In fact, they increased their
    exposure during these episodes.
        Next, we have a very interesting table that shows the so-
    called Sharpe ratios on banks' trading desks, broken out by
    asset class. What this table suggests is that banks are now
    making the vast majority of their money on trading desks from
    legitimate market-making activities, which the Volcker Rule
    allows, and not from inappropriate proprietary trading.
        The Sharpe ratio is a widely-accepted way of measuring
    risk-adjusted returns for banks. In other words, it measures
    the returns that the banks' trading desks are getting on these
    asset classes relative to the amount of risk they are taking,
    which is important, because you can always get higher returns
    by taking more risks.
        So we need a way to adjust for the risk level so we can
    compare performance. The higher the Sharpe ratio, the better
    the returns relative to the risk.
        Now, the most interesting thing is the difference between
    the Sharpe ratios for new positions, existing positions, and
    changes in risk factors. If banks were still doing a great deal
    of proprietary trading, then they would be getting a lot of
    their returns from existing positions, or possibly from changes
    in risk factors.
        In other words, if banks were making proprietary bets that
    the price of a particular security would increase, then they
    would be getting most of their returns from price appreciation
    for securities they already bought, which are existing
    positions in this table.
        But as you can see, the Sharpe ratios for existing
    positions, as well as for changes in risk factors, have
    averages very close to zero. This suggests that banks are not
    engaging in any amount of proprietary trading.
        Instead, the table shows that the banks are mostly
    profiting from new positions. This suggests that trading desks
    at banks are making most of their money by acting as legitimate
    market makers, which is exactly what Congress intended to
    happen under the Volcker Rule.
        In other words, most of the banks' profits are coming from
    the fees, also known as the spread, that banks collect on
    trades they do with their customers. These fees are collected
    up-front, which is why most of the banks' profits are coming
    from new positions.
        So I wanted to share this data with everyone here today
    because I think it is relevant to this hearing. It is important
    that we look at hard data, the facts on the Volcker Rule. And
    based on this data, I would say the Volcker Rule is working.
        I look forward to your testimony.
        Chairman Huizenga. The gentlelady's time has expired.
        I now recognize the vice chairman of the subcommittee, Mr.
    Hultgren from Illinois, for 2 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman. And thank you all
    for being here. It is not a surprise that Congress needs to
    review one of the most debated provisions of the Dodd-Frank Act
    just a few years after it was implemented.
        Unfortunately, the Dodd-Frank Act and the Volcker Rule were
    sold to the American people as a way of protecting taxpayers
    and investors, when in fact they are doing, I would say, just
    the opposite.
        There were mixed feelings among Republicans and Democrats
    when the Volcker Rule was debated in Congress and this was
    probably because policymakers understood proprietary trading
    did not cause the financial crisis and that there would be
    real, practical issues for implementing the proposed
    restrictions on proprietary trading.
        In fact, Treasury Secretary Geithner, who was appointed by
    President Obama, has said, if you look at the crisis, most of
    the losses that were material for both the weak and strong
    institutions, did not come from those activities.
        The realities were so hard for Congress to address that a
    10-page bill became a 932-page regulation with confusing and
    conflicting perspectives from multiple regulators.
        And let us not forget, this does not just apply to our
    largest financial institutions. Compliance burdens also trickle
    down to community banks that have to prove to regulators what
    is already known; they were almost never engaged in activities
    covered by the Rule.
        It is impossible to measure if the Volcker Rule is making
    our markets safer, but we know it is hurting liquidity. The
    lack of clarity around the market making as collusion is of the
    most significant concern. Dealers must have flexibility to hold
    inventory and provide liquidity, especially during times of
    market stress.
        A December 2016 working paper from the Federal Reserve
    staff on the Volcker Rule concluded, ``We find that the net
    effect is a less liquid corporate bond market.''
        This damage to liquidity drives up costs in our fixed
    income markets, makes it more difficult for companies to grow
    and create jobs, drives down returns for investors, and
    increases the potential for market shocks. All of this is very
    concerning.
        I look forward to the testimony today, and I yield back.
        Chairman Huizenga. The gentleman yields back.
        Today, we welcome the testimony of a distinguished panel.
    First, we have Mr. David Blass, the general counsel of the
    Investment Company Institute (ICI).
        Second, we have Mr. Marc Jarsulic, the vice president of
    economic policy at the Center for American Progress.
        Third, we have Mr. Ronald Kruszewski, the chairman and
    chief executive officer of Stifel Financial Corporation, who is
    testifying on behalf of SIFMA.
        Fourth, we have Mr. Thomas Quaadman, the vice president of
    the Center for Capital Markets Competitiveness at the U.S.
    Chamber of Commerce.
        And finally, we have Dr. Charles Whitehead, a business law
    professor from Cornell University.
        Gentlemen, thank you very much for being here. We
    appreciate your time, and you will each be recognized for 5
    minutes to give an oral presentation of your testimony. And
    without objection, each of your written statements will be made
    a part of the record.
        Mr. Blass, you have 5 minutes.

       STATEMENT OF DAVID W. BLASS, GENERAL COUNSEL, INVESTMENT
                           COMPANY INSTITUTE

        Mr. Blass. Chairman Huizenga, Ranking Member Maloney, and
    members of the subcommittee, thank you very much for the
    opportunity to testify today.
        My name is David Blass. I am the general counsel of the
    Investment Company Institute. Our members are mutual funds,
    exchange traded funds, and other registered funds with the SEC.
        We have a very unique perspective on the Volcker Rule
    because our members are funds that are both investment vehicles
    that might be subject to the Volcker Rule, and they are
    investors in the capital markets that themselves are affected
    by the Rule.
        We applaud this subcommittee for reviewing the impact of
    the Volcker Rule on the capital markets, on businesses,
    investors, and job creators. We support appropriately tailored
    regulation that ensures a vibrant, resilient financial system.
    And we support revisiting the Rule to determine whether it is,
    in fact, so appropriately tailored.
        Based on our review, regretfully, we conclude that it is
    not. By all acknowledgements, the Volcker Rule never was meant
    to apply to ordinary stock and bond mutual funds, ETFs and
    other investment funds registered under the Investment Company
    Act of 1940. And there is a good reason for that.
        The Investment Company Act already provides a very
    comprehensive framework of regulation that serves both to
    protect investors and to mitigate risk to the financial system,
    including the very kinds of risks that are at the very heart of
    the policy rationale for the Volcker Rule.
        Registered funds are transparent. They are not highly
    leveraged. Their assets are held in separate custody by bank
    custodians, and transactions with affiliates are either
    outright prohibited or are highly restricted. And boards of
    directors, typically with a majority of independent boards of
    directors, oversee these funds.
        But registered funds and their advisors have been left to
    sort through the many consequences of the Volcker Rule and its
    impact on the capital markets, and I would like to highlight
    three of those for you today.
        First, the final regulation failed to provide a full carve-
    out for registered funds. As a result, many of these funds find
    themselves coming within the definition of a banking entity.
        This could happen in the case of a newly-launched mutual
    fund, for example, whose investment advisor is affiliated with
    a bank. Solely by reason of the advisor's investment of start-
    up capital, referred to as seed money, the new fund itself
    could be subject to the Volcker Rule's trading and investment
    restrictions as if the fund were a bank, and it is not.
        The effect is to place new restrictions on longstanding,
    very commonplace practices that, to the best of our knowledge,
    have never raised any regulatory concerns. It is clear to us
    that Congress never intended this result.
        Now, the agencies charged with implementing the Volcker
    Rule ultimately issued some much-needed guidance very shortly
    before the compliance date. But the 3 years it took the
    agencies to issue that guidance exposes just how cumbersome and
    clunky this rule is to administer.
        And to further compound the problem, that guidance wasn't
    issued through a transparent rulemaking process, but rather,
    through informal agency guidance, which presumably could be
    changed at the whim of the agency's staff.
        Second, the final regulations create competitive
    inequalities. And I will give you one example. They exclude
    from the Volcker Rule's restrictions foreign public funds. That
    is an entirely appropriate exclusion.
        The problem is some U.S. firms and their affiliates also
    rely on this exclusion, and the agencies administering the
    Volcker Rule placed onerous restrictions on those U.S. firms
    and their affiliates. They didn't apply the same restrictions
    for non-U.S. firms, placing U.S. firms at a competitive
    imbalance.
        Third, the Volcker Rule is overly broad and insufficiently
    tailored to its policy objectives. Regulations that sweep too
    broadly introduce friction that influences how important market
    participants, dealers in this case, access the capital markets
    and provide liquidity.
        The Volcker Rule's implementing regulations are
    extraordinarily complex, and they are built upon a presumption
    that all short-term principal trading is ``proprietary
    trading.'' And to overcome this presumption, a banking entity
    has to be able to demonstrate that it qualifies for an
    exemption, and in most cases that is the market making
    exemption, but that is a very high bar, and it puts the banking
    entity at risk of second-guessing.
        Now, many variables affect capital markets activity and the
    liquidity in those markets. Clearly, however, the kind of
    friction created by the overly broad and ambiguous regulations
    included in the Volcker Rule can and does influence the ways in
    which many market participants, dealers and other trading
    partners, including funds, participate in those capital
    markets.
        And for these reasons, among many others, we strongly
    support the committee's examination of the Volcker Rule and its
    consideration of the capital markets more broadly.
        Thank you very much for your attention this morning. I
    would be happy to answer any questions.
        [The prepared statement of Mr. Blass can be found on page
    42 of the appendix.]
        Chairman Huizenga. The gentleman yields back.
        Now, we go to Mr. Marc Jarsulic, vice president, Center for
    American Progress. You have 5 minutes, sir.

     STATEMENT OF MARC JARSULIC, VICE PRESIDENT, ECONOMIC POLICY,
                      CENTER FOR AMERICAN PROGRESS

        Mr. Jarsulic. Thank you, Mr. Chairman, Ranking Member
    Maloney, and members of the subcommittee for the opportunity to
    testify on this important topic.
        I am Marc Jarsulic, the vice president for Economic Policy
    at the Center for American Progress. And today I will attempt
    to outline the importance of the Volcker Rule and to highlight
    the evidence that the Volcker Rule has not caused the
    deterioration in liquidity in the corporate bond market.
        First to the purpose of the Rule. The Volcker Rule was
    intended to do something very reasonable: to prevent bank
    holding companies and their subsidiaries from engaging in
    proprietary trading and speculative fund, hedge fund, and
    private equity investments.
        These activities are capable of generating high levels of
    risk and large losses, which can damage the balance sheets of
    even very large banks.
        The $6 billion lost by JPMorgan Chase in the 2012 London
    Whale incident, which involved proprietary trading-type
    activities, is illustrative of the risks that can be generated.
    We also know from historical experience that with many
    important financial institutions engaged in excessive risk-
    taking, taxpayers can be left bearing the burden when their
    bets go bad.
        During the financial crisis, large amounts of risks were
    shifted onto U.S. taxpayers, as the risks taken by large bank
    holding companies and other important financial market actors
    generated substantial losses.
        Because those losses threatened asset fire sales and
    widespread panic, the Federal Reserve, the FDIC, and Treasury
    were forced to step in to support asset prices and the
    institutions that were threatened with ruinous loss. Trillions
    of dollars of taxpayer funds were put at risk to stabilize the
    financial sector.
        Now, let me make a few remarks about the effects of the
    Volcker Rule. I think there is little question that the post-
    crisis behavior of securities dealers collectively has changed
    significantly compared to the pre-crisis period.
        The total assets of securities brokers and dealers have
    declined from peak values of about $5 trillion in 2008 to about
    $3.5 trillion in 2016, and corporate bond holdings have fallen
    in a similar pattern.
        The decline in corporate inventories is attributed to the
    Volcker Rule and to other regulatory changes sometimes.
    However, the connection between the decline in bond inventories
    and the Volcker Rule is really not that strong.
        As analysts for Goldman Sachs have pointed out, the very
    large run-up in corporate and bond inventories pre-crisis
    reflects the accumulation of positions in private labeled,
    mortgage-backed securities, rather than in traditional
    corporate bonds.
        And they estimate that the declining issuance of those
    bonds and declining prices explain the decline in dealer
    inventories from their peak levels in 2007 to 2012.
        Moreover, while critics of the Volcker Rule have long
    forecast dire consequences for the corporate bond market,
    including declining liquidity and harm to the functioning of
    the capital markets, these negative effects have not
    materialized.
        Liquidity, which is usually thought of as the cost of
    quickly converting an asset into cash, is typically measured by
    a range of indicators, which include the desk spread, the price
    impact, and trade size.
        Data on these indicators do not show deterioration of
    corporate bond liquidity. The desk spread in the corporate bond
    market for both investment grade and high yield bonds has
    declined since hitting a peak in the financial crisis. It is
    now lower than in the pre-crisis period.
        A standard measure of price impact has declined for both
    investment-grade and high-yield bonds since the crisis, and is
    now very low relative to pre-crisis levels.
        Trade size has declined during the financial crisis and has
    not yet recovered to pre-crisis levels. And while by itself
    this might be taken as a measure of decreased liquidities, the
    declines in price impact are inconsistent with this
    explanation.
        Finally, the forecasted harm to corporate access to capital
    has also failed to appear. New issues of corporate bonds are at
    record levels, at or above the $1 trillion per year, for the
    period 2010 to 2015.
        In conclusion, it seems fair to say that the exit of large
    banks from proprietary trading has not had a measurable effect
    on corporate bond market liquidity, liquidity risk, or the
    ability of corporations to raise funds in the capital market.
        With respect to these criteria, our bond markets are
    functioning at least as well, if not better than, they were in
    the pre-crisis period. It is important to remember, however,
    that there is no reason to expect market makers, or any other
    financial market participants, to act as shock absorbers in
    times of extreme stress.
        Market makers will buy assets if they expect to profit from
    their purchases, but in a highly uncertain environment, they
    will not step in to catch a falling knife and cushion large
    price declines. If we want to avoid the problems generated by
    asset bubbles and the crashes that follow them, we need to take
    preventative measures.
        The Dodd-Frank Act, which requires banks and non-banks to
    put more equity on the line when they engage in asset
    purchases, raises equity requirements when assets are funded
    with short-term runnable credit; requires the balance sheets of
    banks to include sufficient liquidity to deal with asset shock,
    price shocks; gets banks out of the business of proprietary
    trading; and provides needed protections.
        Demolition of these preventative measures is likely to be a
    very costly exercise in historical amnesia. Thank you.
        [The prepared statement of Mr. Jarsulic can be found on
    page 56 of the appendix.]
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Kruszewski, thank you for being here today, and you
    have 5 minutes.

    STATEMENT OF RONALD J. KRUSZEWSKI, CHAIRMAN AND CHIEF EXECUTIVE
        OFFICER, STIFEL FINANCIAL CORPORATION, ON BEHALF OF THE
          SECURITIES AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

        Mr. Kruszewski. Chairman Huizenga and Ranking Member
    Maloney, thank you for the opportunity to testify on behalf of
    SIFMA, and as chairman and chief executive officer of Stifel
    Financial Corporation.
        Stifel is headquartered in St. Louis, Missouri, and we own
    an investment bank and a federally-insured depository. Stifel
    employs over 7,000 people, has $20 billion in assets, and
    manages approximately $240 billion for our clients.
        To start, I am not a proponent of the Volcker Rule. I
    believe it provides little benefit regarding its stated purpose
    to reduce systemic risk. However, I have the upmost respect for
    Mr. Volcker, and to be clear, my criticism of the Rule is not a
    criticism of him. I remember all too well the accomplishments
    of Mr. Volcker as Fed Chairman in fighting the rampant
    inflation of the 1980s.
        Let me begin with my conclusion: It is my personal view
    that the Volcker Rule needs to be repealed. If not repealed, it
    must be materially amended to avoid further damage to the
    markets my company serves. Why be so bold? It is simple cost-
    benefit analysis.
        Stifel serves small and middle market companies and the
    investors in those same companies. We, therefore, have a front
    row seat to comment on the impact of Volcker on these
    companies.
        Make no mistake, I do not believe deposit-taking banks
    should be making risky short-term speculative bets. And, in
    fact, the law has long prohibited such activity.
        But I believe the way to regulate risk, systemic or
    otherwise, is not by inhibiting trading or traditional market
    making, which provides liquidity and depth to our capital
    markets, but rather through capital and liquidity rules.
        The financial crisis was rooted in the loan book, not the
    trading book. Paul Volcker himself, in a speech in 2010,
    acknowledged that proprietary trading did not cause the
    financial crisis or contribute to the failure of a bank.
        The Volcker Rule is beyond complex, covering over 950 pages
    and 2,800 footnotes. You need a team of law firms, not just
    lawyers, to be able to decipher this.
        The Rule includes a provision called Reasonably Expected
    Near Term Demand (RENTD), a concept only Government could
    devise. RENTD limits market making so it does not exceed the
    reasonably expected near term demand of clients, customers, and
    counterparties.
        Seven years after the enactment of Dodd-Frank, I am no
    closer to understanding what that term means or how to
    implement something so amorphous. Compliance with Volcker is
    governed by five separate agencies. That is five separate
    agencies. This fact alone supports a full repeal of this rule.
        In addition, the covered funds provisions of the Volcker
    Rule reached far beyond the intended focus on the use of hedge
    funds and private equity to facilitate indirect, impermissible
    proprietary trading. The provisions are highly technical and
    not focused on the actual activities of the entities that are
    captured.
        But what about the cost side of this equation? The Volcker
    Rule makes our capital markets less liquid, which increases the
    cost of capital for Stifel's clients, especially smaller
    companies which are major contributors to job creation.
        Stifel helps our clients by assisting them in raising
    capital from both the equity and debt markets. As part of this
    equation, Stifel commits to make markets, which benefits both
    the issuing company and the purchaser of the equity or the
    debt.
        Volcker materially impacts our ability to effectively make
    markets. This in turns causes the buy side to require higher
    compensation, reflected in lower equity valuations or higher
    interest rates. Investors now demand a significant liquidity
    premium for bonds issued by smaller firms.
        Because it is difficult to raise capital, small firms
    increasingly are finding it difficult to compete with larger
    firms. Instead, they are selling themselves to their larger
    competitors. In fact, a lot of the corporate bond issuance is
    from large firms financing the acquisitions of small firms, the
    highest share in 15 years.
        As a result, the economy is likely to see less job
    creation, less competition, less research and development in
    CAPEX, and frankly, less vitality overall.
        As I stated, I personally believe the Volcker Rule should
    be repealed. If not repealed, at a minimum, the Volcker Rule
    should be modified to: first, reverse language that assumes
    that all trades are proprietary unless proven otherwise; and
    second, eliminate the RENTD requirement.
        Prominent policymakers have also raised concern with how
    the Volcker Rule is working in practice. As noted, former Fed
    Governor Jeremy Stein co-authored a recent article which
    stated, ``The Rule may dissuade dealers from providing
    liquidity during a market correction.''
        The article further stated that it is difficult to enforce,
    while at the same time creating large compliance and
    supervisory costs. On balance, we believe the Rule should be
    repealed. Recent Fed staff reports say that the Volcker Rule
    has a deleterious effect on corporate bond liquidity.
        Federal Reserve Governor Jay Powell urged Congress to
    rewrite the Volcker Rule, stating in part that what the current
    law and Rule do is effectively force you to look into the mind
    and the heart of every trader to see what their intent is.
        We should not be debating whether or not banks should get
    relief from Volcker. Instead, we should be debating whether our
    economy benefits from this Rule. From my vantage point, based
    on the clients I serve, it does not. Thank you. I look forward
    to your questions.
        [The prepared statement of Mr. Kruszewski can be found on
    page 65 of the appendix.]
        Chairman Huizenga. Thank you for your input.
        Mr. Quaadman, you are recognized for 5 minutes.

    STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER
     FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

        Mr. Quaadman. Thank you, Mr. Chairman, Ranking Member
    Maloney, and members of the subcommittee. Thank you again for
    holding this hearing and for the subcommittee's continued focus
    on the Volcker Rule, as well as issues impacting the ability of
    businesses to raise capital.
        The Chamber first started raising concerns with the Volcker
    Rule when President Obama introduced it in February 2010. We
    were concerned that the Volcker Rule would make it difficult to
    delineate market making and underwriting from proprietary
    trading.
        The Justice Potter Stewart Rule of, ``you know it when you
    see it,'' does not lend to clarity or for the certainty needed
    for businesses to raise capital or for markets to be efficient.
        We were also concerned that it would lead to complex
    regulation, and it would have a chilling effect on businesses'
    ability to raise capital. Instead, while understanding the
    intent of the Volcker Rule, the Chamber proposed a pro-growth
    alternative for those firms that would engage in proprietary
    trading higher capital standards.
        Instead, today we have both. We have a complex Volcker
    Rule, and higher capital standards that have their own OECD
    regulatory regime. Additionally, the Volcker Rule is the poster
    child of why good economic analysis is necessary for
    rulemaking. No economic analysis was performed or shared with
    the public while regulators were considering the Volcker Rule.
        The OCC belatedly, 4 months after the Rule was finalized in
    December 2013, issued an economic analysis that also did not
    look at the impacts of the Volcker Rule upon consumers, the
    consumers of banks, or the broader economy.
        The irony is that the Volcker Rule, which is designed to
    limit the impacts of proprietary trading on depository
    institutions, where the banking regulators were required under
    the Riegle Act to do an economic analysis to understand what
    the impacts were on depositary institutions and their
    consumers; yet, it was not done.
        In 2012, we had a study done by Professor Anjan Thakor of
    Washington University to list out what the business concerns
    and issues were with the Volcker Rule. And unfortunately, those
    are coming to fruition: bond markets are stressed with less
    liquidity; we have fewer market makers; and we have poor
    execution and diminished price discovery.
        The Federal Reserve-authorized study that we have talked
    about today finds that corporate bond markets' stress is
    attributable to the Volcker Rule. Additionally, we have seen
    increases in cash reserves by corporations, 50 percent in the
    S&P 500 since Dodd-Frank was passed in 2010, and over $100
    billion just in the first year of the Volcker Rule.
        The one thing that the Volcker Rule, as well as other
    regulations, has done, is increasingly forced corporations to
    use U.S. Treasuries as the sole means of cash management, which
    is increasing risk.
        If doctors were to prescribe a series of strong drugs and
    not check on drug interactions, they would be sued for
    malpractice. The Volcker Rule doesn't exist in a vacuum. And we
    have to look at it in conjunction with the Basel III
    implementation rules, the SIFI rules, risk retention rules,
    money market funds, and the like.
        All of those combine in one place, and that is the
    corporate treasurer's desk. Our 2016 treasurer survey, which
    interviewed over 300 treasurers, found that 79 percent of
    treasurers felt that financial regulations were adversely
    impacting their business' ability to raise capital, that
    current and pending regulations were making cash and liquidity
    operations more challenging, and \1/3\ of treasurers were
    forced to take unexpected actions because of regulations.
        Businesses are now passing higher costs on to consumers.
    One-third of treasurers see the situation worsening over the
    next 3 years if things do not change. And what has changed
    since 2013 is that businesses are dramatically using less banks
    in order to perform their financing functions.
        The Chamber supports the repeal of the Volcker Rule. But in
    the alternative, we will make four recommendations: one, that
    the regulators perform an economic analysis to the Volcker Rule
    and to also determine its impacts on bank customers in the
    broader economy; two, a cumulative impact analysis to the
    Volcker Rule and other regulations with the same accord. three,
    for the regulators to report back to Congress on findings and
    then anticipate a plan of action to address these failures; and
    lastly, the Congress should require banking regulators to do an
    economic analysis when writing rules subject to public review
    and comment, as other agencies do throughout the Government.
        Thank you, Mr. Chairman. I am happy to answer any questions
    you have.
        [The prepared statement of Mr. Quaadman can be found on
    page 79 of the appendix.]
        Chairman Huizenga. Thank you very much.
        And last, but certainly not least, Mr. Whitehead, you are
    recognized for 5 minutes.

       STATEMENT OF CHARLES K. WHITEHEAD, MYRON C. TAYLOR ALUMNI
     PROFESSOR OF BUSINESS LAW, AND DIRECTOR, LAW, TECHNOLOGY, AND
              ENTREPRENEURSHIP PROGRAM, CORNELL UNIVERSITY

        Mr. Whitehead. Thank you very much, Mr. Chairman, Ranking
    Member Maloney, and members of the subcommittee. Thank you for
    inviting me to testify today regarding the impact of the
    Volcker Rule on the financial markets and the general economy.
        My name is Charles Whitehead, and I am a professor at
    Cornell University. Before becoming an academic, however, I
    spent 17 years in the private sector and held senior legal and
    business positions in the financial services industry in New
    York and Tokyo.
        I testify today in favor of repealing the Volcker Rule. A
    principal goal of the Volcker Rule is minimizing risky trading
    activities by banks and their affiliates and consequently
    enabling banks to pursue a traditional banking business in
    providing capital to businesses and consumers.
        What the Rule fails to reflect is change in how credit is
    provided today, moving from traditional banking to increasing
    participation by banks in the capital markets. This necessarily
    involves the banks' use of their own balance sheets to buy and
    sell securities as part of a market making function.
    Artificially constraining their ability to do so affects the
    smooth operation of the capital markets.
        Now, there is certainly an argument for regulating risky
    trading activities. But as you have heard today, the Volcker
    Rule addresses the wrong problem in the wrong way.
        The Volcker Rule was sold to Congress as a response to the
    2008 financial crisis, an attempt to reduce risk in banks,
    principally by banning short-term proprietary trading directly
    by banks and their affiliates and indirectly through
    investments and hedge funds and private equity funds.
        But why was restricting short-term proprietary trading a
    solution to the crisis? The answer is far from apparent and is
    unsupported by the facts that Congress had at the time. As
    Treasury Secretary Geithner testified, ``Most of the losses
    that were material did not come from proprietary trading
    activities.''
        Rather, many of the most significant bank losses arose from
    traditional extensions of credit, especially loans related to
    real estate.
        I believe it is fair to say that the Rule's proponents were
    less interested in curing a particular cause of the financial
    crisis and more interested in championing the view that
    commercial banking should be separated from investment banking,
    particularly prop trading and principal investments.
        By barring proprietary trading by banks and their
    affiliates, the Rule's sponsors hope that utility services,
    such as taking deposits and making loans, would once again
    dominate the banking business. But that view reflected more
    hope than experience.
        In light of the fluid and evolving nature of the financial
    markets, it was unlikely that regulation could force a return
    to the financial sector model of an earlier era when banks and
    bank lending were kept separate from the capital markets.
        What has been the result? The Volcker Rule imposes a static
    divide, a financial Maginot Line between short-term proprietary
    trading and banking, but does so within a world where capital
    markets and bank loans compete for corporate lending, and fluid
    financial markets continue to evolve and can sweep around the
    fixed position.
        Changes in the financial markets spurred by the Volcker
    Rule still expose banks to the kinds of risks the Volcker Rule
    was intended to minimize or eliminate. Hedge funds and other
    less-regulated entities, whose activities can affect banks and
    bank risk-taking, picked up the proprietary trading that had
    exited banks and their affiliates.
        Moreover, in order to make up for losses in revenues,
    banking entities shifted their risk-taking activities to other
    businesses, increasing their risk-taking potentially through
    activities with which they were less familiar than the
    proprietary trading they were compelled to abandon.
        The problems around the Volcker Rule are exacerbated by
    practical difficulty in implementing the Rule itself. What is
    proprietary trading, and how is it distinguished from market
    making?
        When implementing the Rule, the regulators noted that it
    was difficult to define certain permitted activities because it
    ``often involves subtle distinctions that are difficult both to
    describe comprehensively within regulation and to evaluate in
    practice.''
        Likewise, industry participants have complained that the
    lack of definitional bright lines make it difficult for banks
    to comply with the Rule. As a result, banking entities have had
    to incur substantial costs in order to implement cumbersome
    supervisory and compliance regimes.
        And in order to avoid stepping over the line, many have
    pulled back from permissible market making activities. The
    resulting increase in investors' execution costs and the
    decline in market liquidity means that investors will demand
    higher yields on new bond issuances.
        And you want to note, the challenge is not how much capital
    is raised but the incremental cost to issuers of raising it, a
    cost that affects Main Street as much as it affects Wall
    Street. The result is costly regulation with limited upside and
    the potential for greater downside.
        There are legitimate reasons to be concerned over the risks
    associated with a bank's trading operation. But those risks can
    be more effectively addressed through other means, such as
    imposing capital charges on a bank's trading books and the
    traditional bank regulator's focus on risk management and
    assessing a bank's safety and soundness.
        For those reasons, I believe the Volcker Rule should be
    repealed. Thank you very much.
        [The prepared statement of Mr. Whitehead can be found on
    page 198 of the appendix.]
        Chairman Huizenga. Thank you all very much for your
    testimony. And I appreciate you being here.
        I guess I will start off my line of questioning with a
    quick comment, and then dive into questions. I would like to
    note that although the slides that the ranking member put up
    seemed to look pretty impressive, it is somewhat interesting to
    me, as chairman of this subcommittee, that the Fed staff didn't
    see fit to provide me or Majority staff with any sort of
    briefing on the data.
        I know I am merely the chairman of the subcommittee, but I
    believe that also is true for the actual chairman of the full
    Financial Services Committee, Chairman Hensarling. So I look
    forward to getting that briefing at some point. I also look
    forward to addressing that particular issue with Chair Yellen
    when she is in front of this committee in the future.
        But I don't feel like I can adequately comment on the
    slides because, again, with no real understanding of what the
    Fed is trying to get at, I don't know that I would be able to
    address that.
        I believe, Professor Whitehead, you might have done some
    work on this. So I will look forward to doing that.
        But I will point out that even I understand and appreciate
    that the purpose of the value at risk (VaR) is to measure risk
    and not liquidity, which is, in fact, what we are trying to
    look at here today. And it's easy to note that outliers on
    these, even on those charts, don't present whether they have
    great risk or little risk.
        But I would also like to remind everybody that the point of
    the hearing today is what is the impact of Volcker on our
    capital markets? And the question is, are capital markets less
    liquid as a result of Volcker?
        And I think the answer is a pretty clear ``yes.'' So we are
    not here to debate whether or not banks are making money. The
    question is, are they providing liquidity into the marketplace?
        So Professor Whitehead, I believe you note in your
    testimony that none of the financial regulators have published
    any data or analysis on the metrics that they are required to
    provide. Is that correct?
        Mr. Whitehead. That is correct.
        Chairman Huizenga. And, as you know, what has been made
    public, I guess so far, is a report issued by the staff of the
    Federal Reserve in December which concluded that, ``Since
    Volcker affected deals, dealers have been the main liquidity
    providers. The net effect is that bonds are less liquid during
    times of stress due to the Volcker Rule.''
        So Professor Whitehead, can you please expand on what the
    Fed staff report might be concluding there, and why? I know you
    have some interesting research that you had referenced as well.
        Mr. Whitehead. Sure. Thank you very much, Mr. Chairman. The
    Fed staff report does an analysis that I think is important to
    understand not just in terms of the results, but also the way
    they have conducted the analysis. The question is not aggregate
    liquidity, and the question is not aggregate bond issuance.
        The real focus here is on relative liquidity, the extent to
    which there has been an impact on liquidity as a result of the
    Volcker Rule. And that is what the study does.
        So what they do is they are taking a baseline. They look at
    below investment grade bonds, BB bonds. And they use that as
    kind of a baseline for what liquidity might be generally in the
    market, both before and after the Volcker Rule. What they then
    do is they take a look at bonds that have dropped in credit
    quality.
        And this is key. During times of financial stress, you are
    going to see bonds collapse. And you need to have a market
    maker precisely at that time. This was one of the problems
    during the financial crisis. There was no one there to make
    that market.
        And what they find is, comparing both the pre- and the
    post-Volcker Rule, and using this baseline of below investment
    grade bonds as kind of their gauge as to whether or not the
    Volcker Rule has had an impact, is that when you see a credit
    decline, you see a substantial drop relative to the pre-Volcker
    period of liquidity in the marketplace.
        And, in fact, the point that is probably the most
    distressing in the report is they find that the level of
    illiquidity is quite similar to the illiquidity for similar
    distressed bonds during the financial crisis.
        And so rather than finding no impact, they find quite a
    substantial impact precisely in the class of bonds that we are
    most concerned about, namely those bonds where you need to have
    a market in order to manage your risk, again, during times of
    financial crisis.
        Chairman Huizenga. Thank you for that.
        Mr. Kruszewski, you note in your testimony that Volcker--I
    think the quote is, ``Volcker materially impacts your--and
    presumably, your fellow SIFMA members' as well--ability to
    effectively make markets and that the ultimate impact is a
    higher cost of capital.''
        I would like you to explain, but I do also want to
    highlight that on page 3 of your written testimony, I think one
    of the best lines is, ``A compliance expert would also need to
    be a psychiatrist trained in determining the intent of each
    trade by a trader.'' So if you could maybe unpack that a little
    bit?
        Mr. Kruszewski. Yes, we do need psychiatrists on our
    compliance staff now to get into the minds of our traders
    pursuant to Volcker.
        I do want to just add one thing, if I may? I believe that
    this very debate and the confusion in this debate was
    highlighted by putting up charts on VaR, which is value at risk
    and then using that to make an argument about Volcker.
        I find it to be apples and oranges at best. VaR is risk on
    the balance sheet. What we are talking about is the mechanisms
    to provide liquidity in the plumbing of capital markets. And
    Volcker absolutely hinders that.
        And that is, to answer your question, when we raise money
    for our clients, we commit to make markets. That liquidity is
    needed for efficient raising of capital.
        The Volcker Rule, because of the way it is written and its
    presumption that every trade is a proprietary trade unless
    proven otherwise, is a hindrance and a significant hindrance on
    the ability to make markets and to make effective markets.
        That, in turn, raises the cost of capital. And I do note in
    my written testimony that small issuers, on average, holding
    for credit maturity pay 75 to 100 basis points higher because
    of liquidity.
        Chairman Huizenga. All right, thank you. My time has
    expired.
        With that, I recognize the ranking member for 5 minutes.
        Mrs. Maloney. Thank you. Just to clarify, the information
    that was provided to me from the Federal Reserve was in
    response to a list of questions that I sent to them requesting
    this specific data. I am sure they would be willing to provide
    it to any Member of Congress and meet with them on it.
        But I would like to ask some questions about it to Mr.
    Jarsulic. And I would like to ask you about the Volcker data
    that I put up on the screen.
        My takeaway from the two charts of risk levels on the
    banks' trading desks is that the Volcker Rule has not caused
    banks to pull back from market making even during periods of
    market stress. Is that your interpretation as well, Mr.
    Jarsulic?
        Mr. Jarsulic. Looking at these graphs from a distance, it
    does appear to me that there is essentially stable VaR across
    the various measures. And the VaR is stable even in time
    periods, as you pointed out, where there were some shocks to
    the market, the failure of Third Avenue, for example.
        And that suggests to me that the market making activity of
    the firms that we are looking at here, the firms that the Fed
    is looking at here, remains relatively stable during times of
    stress. And that suggests to me that these market makers are
    providing liquidity services in a very stable fashion.
        Mrs. Maloney. In the second slide, which shows the returns
    the banks are getting from all the different asset classes they
    are trading, it shows a sharp difference between the returns
    that banks are getting on new positions versus existing
    positions.
        Can you talk about why it is important that banks are
    getting most of their returns from new positions rather than
    from existing positions? And what does that say about how the
    Volcker Rule is working?
        Mr. Jarsulic. The positive returns from new positions and
    essentially zero returns from existing positions, as you
    describe these data, suggests that they are earning profits
    from fees and commissions, that is from the assets they take on
    newly into their balance sheet, but that the inventory costs,
    the hedging costs for positions that they hold for longer
    periods of time in total are not producing significant profits
    for them.
        So that does suggest to me that the model is changing, that
    they are moving toward a real market making function where
    market makers try to run essentially flat books and earn their
    fees or earn their profits from fees and commissions.
        Mrs. Maloney. So this data basically suggests that banks
    are not engaging in a significant amount of proprietary
    trading--it is a bottom line?
        Mr. Jarsulic. These data are certainly consistent with that
    view, yes.
        Mrs. Maloney. And I would also like to ask you, do you
    think that this kind of data on Volcker Rule compliance is
    helpful because it allows us to monitor how the banks are
    reacting to the Volcker Rule and the impact that the Volcker
    Rule is having on markets? And do you think the regulators
    should be making this type of data public on a regular basis?
        Mr. Jarsulic. I would certainly agree that transparency in
    the functioning of this regulation and others is certainly
    important. The Federal Reserve, through publication of Y-9s for
    major bank holding companies, provides people with a lot of
    information about how banks are conducting their business, and
    therefore, you have direct and indirect information about the
    functioning of regulation.
        I think people are interested, and rightly so, in the
    effect of the Volcker Rule and other regulations. And to the
    extent that these data can be produced on a regular basis to
    make the functioning of the financial system and the impact of
    the Rules transparent seems like a great idea.
        Now, there may be issues about how data are presented, how
    frequently, whether it ought to be current or not, what level
    of aggregation it needs to be presented. And I am sure the Fed
    would have views on that. But in general, I think the more
    transparency, the better.
        Mrs. Maloney. Thank you. My time has almost expired. Thank
    you.
        I have other questions if there is a second round. Thanks.
        Chairman Huizenga. The gentlelady yields back.
        With that, the Chair recognizes the vice chairman of the
    subcommittee, Mr. Hultgren, for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman.
        And thank you all, again, for being here.
        I want to address my first question to Mr. Kruszewski. Your
    written testimony notes that small and midcap issuers have
    experienced a disproportionately negative impact under
    structural changes to our fixed income markets, including the
    Volcker Rule.
        Citing your written testimony, ``Since 2010, the number of
    deals sized at $2 billion and above has doubled, whereas the
    number of smaller deals, below $2 billion, has fallen by nearly
    half.'' Why do you believe these small and midcap issuers are
    experiencing a disproportionately negative impact?
        And, as you know, small and medium companies are the
    foundation of competition and growth for our economy. So I
    think this is an important question for us to understand.
        Mr. Kruszewski. It is not only in the bond markets. It is
    across the spectrum of capital raising. So you will note that,
    and I am sure there is plenty of testimony about why we don't
    have very many IPOs anymore either.
        For the debt markets, you need liquidity to efficiently
    price bonds. And it has become increasingly difficult. And
    Volcker is one reason to provide liquidity to the buy side to
    buy a bond. I find these charts interesting, that seem to
    suggest that banks are complying with Volcker. They are
    complying with it. It is the law.
        The question is the impact of that on issuing companies.
    And what my testimony, written and oral, says, and then from my
    position of being a market participant, I will tell you that if
    the intent of the Volcker Rule is to raise the cost of capital
    on job-creating companies, then it is a huge success.
        If its intent is to try to reduce some systemic risk in the
    trading books, there is no need for that. The ultimate cost to
    the economy is less liquidity and higher cost for smaller
    companies.
        Mr. Hultgren. Mr. Kruszewski, you probably have heard Jamie
    Dimon's quote. He said, ``If you want to be trading, you have
    to have a lawyer and a psychiatrist sitting next to you to
    determine what your intent was every time you did something.''
    Or maybe Governor Powell's quote, ``The Volcker Rule
    effectively forces you to look into the mind and heart of every
    trader on every trade to see what their intent is.''
        I wonder if you could describe how the Volcker Rule's
    datacenter compliance framework attempts to replicate this
    concept of mind reading, and what compliance challenges does it
    pose for companies like yours?
        Mr. Kruszewski. First of all, the Volcker Rule has a
    presumption that every trade is a proprietary trade unless
    otherwise shown and then tries to use metrics to prove that
    point, or at least to allow you to have a safe harbor to get
    out at that point.
        And again, this will go back to why it is hard for small
    companies. The very definition of liquidity requires that in
    times of market making and in times of stress, you will make
    markets that will be different than the RENTD requirement of
    Volcker.
        In times of stress, there is more demand or more supply,
    and that is when you need to step up and do that. The Rule is
    very interesting in that even if you have an intent to meet
    customer demand but do not do so in a timeframe, you are in
    violation of the Volcker Rule.
        So you put all of these things together, and from my
    perspective I obviously do not want to violate any law of the
    land, what we will do is we have compliance and try to use
    these metrics which, as I testified, significantly and
    materially impacts our ability to make markets, especially in
    small, illiquid issues which, again, are bearing the brunt of
    the Volcker Rule.
        Mr. Hultgren. Mr. Blass, page 10 of your testimony includes
    a line from Vanguard describing how liquidity is obtained along
    a cost continuum. I wonder if you could explain how reductions
    in liquidity under the Volcker Rule, like we are discussing
    today, impact funds and those who depend on them for retirement
    security?
        Mr. Blass. Thank you very much. I think if you polled our
    members, they would give you a disparate view of liquidity in
    the markets. There are some interesting data points. If you
    compare today's markets in corporate fixed income compared to
    the markets 10 years ago, you will see smaller transaction
    sizes, fewer block trades. It is more work to execute
    transactions.
        There are some other data points. The transactional volume
    remains robust, so across our membership they will find that
    liquidity is available, recognizing that there are many other
    market participants.
        To your question, to the extent that market liquidity is
    not available, or becomes less available, it certainly drives
    up costs to market participants seeking to access certain
    instruments.
        Mr. Hultgren. Thank you. My time is winding down, so I will
    yield back.
        Chairman Huizenga. The gentleman yields back.
        The Chair recognizes Mr. Himes from Connecticut for 5
    minutes.
        Mr. Himes. Thank you, Mr. Chairman. And I thank you all for
    being here. This is an important and interesting topic, one I
    have looked at for a long time. And I have studied the
    testimony here closely.
        Mr. Kruszewski, I have studied your testimony particularly
    closely, but I keep stumbling over this line in your testimony
    where you say, ``The Volcker Rule includes a provision called
    RENTD, a concept only the Government could devise.'' What do
    you mean by, it is a concept only the Government could devise?
        Mr. Kruszewski. From a business perspective, you can't
    implement it.
        Mr. Himes. I know, but you are pointing at the Government.
    What does it mean, ``a concept only the Government could
    devise?''
        Mr. Kruszewski. I think I answered it. I did say it is a
    concept that from a business perspective--as I said, I still do
    not understand the concept--
        Mr. Himes. I will get to that. I am just troubled by the
    derogatory quality of that. Can you tell me what the three
    largest banks in the United States are today?
        Mr. Kruszewski. Do I know the three largest banks?
        Mr. Himes. What are the three largest by assets in the
    United States today?
        Mr. Kruszewski. JPMorgan, Wells, and Bank of America.
        Mr. Himes. It is JPMorgan, Bank of America, and Citigroup.
    And my question for you is, would any of those three banks, all
    of whom are your members, exist in anything resembling their
    present form had they not been recipients of the Troubled Asset
    Relief Program (TARP), a Government program?
        Mr. Kruszewski. You should ask them. I don't want to answer
    questions for them.
        Mr. Himes. But you, in your derogatory treatment of the
    government, would at least acknowledge that those three banks
    would have a hard time being with us today had it not been for
    a government program?
        Mr. Kruszewski. To the extent you take my comment as
    derogatory, I did not mean it that way, so I apologize if you
    read it as derogatory. I meant it from a business perspective.
        Mr. Himes. Okay. Well, let us go to reasonably expected
    near-term demand, which is the subject here. And I actually
    think this is really interesting. I don't actually have that
    much problem with the idea of a reasonably expected near-term
    depend.
        I sort of explain it in terms of small business. You know,
    in my district, if we have a Toyota dealer and the Toyota
    dealer sells 100 Toyotas a month, he keeps 120 on the lot,
    maybe 130. He doesn't keep 400, and he doesn't keep an Aston
    Martin.
        If he is keeping 400 or if he is keeping an Aston Martin,
    something is happening there other than him keeping an
    inventory that is consistent with reasonably expected near-term
    demand.
        And by the way, I will stipulate that this is a complicated
    Rule and it is hard to draw those fine distinctions, but isn't
    the fundamental idea that the banks ought to be able to keep
    enough inventory to make markets but they shouldn't have a lot
    more volatile assets on their books? Isn't that fundamental
    principle pretty reasonable?
        Mr. Kruszewski. To make markets by rules and metrics, you
    don't have a rule that says that that dealer can only have 100
    cars. It is up to that dealer to determine reasonable demand.
    He may or may not be wrong, and he will mark down his inventory
    appropriately.
        You just are creating a rule which limits liquidity. If
    that car dealer wants to make a loan, if he is a public
    company, the Rule that you put in place will raise the cost to
    capital for that car dealership.
        Mr. Himes. No, I understand that, and of course there is a
    pretty dramatic difference between my Toyota dealer and the
    bank, which is that the Toyota dealer is disciplined by the
    fact that if he keeps 700--in my example--cars on the lot and
    it goes wrong, he goes out of business.
        And the FDIC is not there to bail him out. The TARP is not
    there to bail him out, the 1994 Peso rescue is not there to
    bail him out. So I guess my big question, and this is for the
    panel as a whole, I have heard a lot of talk about short-term
    proprietary trading.
        Does anybody here think that FDIC-insured institutions
    should be taking long-term proprietary bets? Okay. The silence
    there I am going to take to be a ``no.''
        Does anybody think that the real exercise here is not so
    much making it possible for depository institutions to make
    proprietary bets of any kind, but the Holy Grail here is to
    make sure that they have enough near-term inventory to make
    markets? Or does somebody want to make the argument that they
    should be able to take proprietary bets?
        Mr. Kruszewski. I think the difference is that drawing a
    line between market making and proprietary bets, as Volcker
    tries to do, is extremely difficult when you put it into law,
    and will cause financial institutions not to make markets
    because every trade is presumed under Volcker to be
    proprietary. That is bad policy.
        Mr. Himes. No, no, and I will grant you that. I actually
    think it is a pretty complicated rule and I understand Jamie
    Dimon's comments about psychology.
        But I think this is an important point, because I think
    that the burden is not on the regulators to explain why insured
    institutions should not be able to take proprietary bets. I got
    total silence here when I asked whether those institutions
    should take proprietary bets of any kind.
        I would just point out that I think the burden is on the
    industry to come up with constructive ways, if there are more
    constructive ways, of determining a legitimate inventory as
    opposed to making the argument that we should take away the
    idea that proprietary trading is somehow permissible inside a
    depository institution.
        So I thank you for being here.
        And thank you, Mr. Chairman.
        Mr. Hultgren [presiding]. The gentleman's time has expired.
        The Chair recognizes the gentlewoman from Missouri, Mrs.
    Wagner, for 5 minutes.
        Mrs. Wagner. Thank you, Mr. Chairman, and thank you all for
    appearing here today to discuss the effects that the Volcker
    Rule has had on our capital markets, specifically on market
    making, which is important for holding down the cost of credit
    for consumers from credit cards, mortgages, to businesses that
    are seeking to issue debt and raise capital.
        Additionally, it also helps savers by allowing the funds
    that they are invested in to easily sell assets at a
    competitive price in order to meet redemption calls from its
    investors.
        For these reasons, the Volcker Rule is not something that
    simply affects broker-dealers and traders, but it has an impact
    on U.S. companies, their employees, and individuals saving for
    retirement or to send their kids to college.
        Mr. Quaadman, welcome back, and I believe the notion behind
    the Volcker Rule was that it would prevent Wall Street-sized
    banks from engaging in proprietary trading, but can you discuss
    how many other institutions that don't conduct any proprietary
    trading, even community banks, for instance, have been affected
    by the Volcker Rule in having to prove to regulators that they
    are not engaged in these activities?
        Mr. Quaadman. Yes, thank you, Congresswoman Wagner. First
    of all, I would also just like to state, too, that in January
    2012 at a hearing here, Governor Tarullo also mentioned that
    the regulators who were drafting the Volcker Rule did not
    understand the markets or the products that they were trying to
    regulate here. So I think that is important to note.
        In terms of how this impacts other institutions, there are
    many institutions, including regional banks, even sometimes
    joint ventures overseas that non-financial businesses are
    engaged in, that have to create Volcker compliance programs.
        So I think even if the intent was to look at a small number
    of institutions, this has actually been broadened out. And as
    you start to put that on mid-sized and regional banks, that
    does have liquidity impacts on Main Street.
        Mrs. Wagner. I appreciate that.
        I have a couple more vocal questions, and I know this
    question is a bit off topic, Mr. Chairman, but I would ask your
    indulgence. I feel it is timely as we approach the April 10th
    applicability date of the Department of Labor's fiduciary rule.
        I would like to address a question to Mr. Kruszewski, who
    is, by the way, a constituent of mine. He is chairman and CEO
    of Stifel and is very active in the community affairs in the
    Greater St. Louis area, and here on behalf of SIFMA.
        Sir, I do not find your testimony to be in the least bit
    derogatory. I find it common sense, and frankly, refreshingly
    honest. You deserve the respect of this committee, as do all of
    you.
        Mr. Kruszewski, could you please explain the effect that a
    lack of certainty in waiting on the Administration to delay the
    Rule has had on your business as we get closer to the
    compliance date and the impact this misguided rule could have
    on your customers?
        Mr. Kruszewski. Thank you, first of all, but there is a lot
    of confusion regarding the Department of Labor rule and
    certainly the implementation date, which has clients and the
    industry and you name it, very confused as to how, if, and when
    this will be implemented.
        As I have testified in front of the DOL in a number of
    cases, this rule, while well-intended in certain cases, will
    have the result, for my clients, and I only speak to our
    clients, we have tens and tens of thousands of clients who will
    either lose advice or will have their costs raised, and raised
    significantly, because we will move them to a fee basis to do
    that.
        And I find that, and I have said I have found that to be an
    unintended consequence of this rule and a very costly one to a
    significant number of our clients, tens of thousands.
        Mrs. Wagner. Tens of thousands of low- and middle-income
    investors.
        Mr. Kruszewski. This rule significantly impacts small
    savers.
        Mrs. Wagner. Thank you very much. I appreciate it.
        Let me go back to Mr. Quaadman in my brief time. As you
    know, President Trump earlier this year issued an Executive
    Order on core principles regarding regulations affecting the US
    financial system to determine if laws and guidance promote
    fostering growth and enabling U.S. competitiveness.
        Do you believe the Volcker Rule can promote those
    principles outlined in the President's Executive Order?
        Mr. Quaadman. No. It has made it more difficult for smaller
    and mid-sized businesses to raise the capital that they need
    and that it has not made the capital markets at all more
    efficient. And it has, in fact, built in many inefficiencies,
    particularly when combined with the other regulations that I
    was talking about as well.
        Mrs. Wagner. Thank you very much. My time has expired.
        I yield back, Mr. Chairman. Thank you.
        Chairman Huizenga. The gentlelady yields back.
        With that, we recognize the gentleman from Georgia, Mr.
    Scott, for 5 minutes.
        Mr. Scott. Yes, and thank you very much. I really cannot
    stress enough how important the Volcker Rule is. I call to your
    remembrance the situation with the London Whale, I believe it
    was, where proprietary funds, banks' customers' funds were used
    for risky bets. That caused a problem.
        The Volcker Rule must stay in place. But that is not to say
    that we do not want to make sure that it is working as it is.
    One of the goals of the Volcker Rule was to de-risk the
    markets. And as we all know, in pre-2008 banks were, indeed,
    allowed to take these risky bets with fully federally-insured
    dollars, putting the taxpayers at great risk, ergo the London
    Whale.
        But with that said, we will never be able to fully de-risk
    financial markets because we all know that fully de-risking
    markets is not what is best for the average American because
    almost every bank in the country, big and small, will go out of
    business. Because banks, indeed, have to make money as well.
        So with that said, Mr.--I am afraid, and I do not want to
    mess up anybody's name, but I just got here, so I didn't have
    time to practice. But I think it is Mr. Ronald--
        Mr. Kruszewski. Kruszewski.
        Mr. Scott. --Kruszewski? I'm sorry. And maybe Mr. Jarsulic.
    I think you are the two that I want to ask this question. I'm
    sorry. I hope I didn't do too badly.
        Do you agree with what I am saying? What sort of economic
    growth will we have if you completely de-risk the system? And
    give me your understanding of the Volcker Rule, from your
    perspective. Did it go too far in de-risking or did it do too
    little?
        Mr. Jarsulic. Congressman, I do agree with you that
    financial institutions are in the business of bearing risk, and
    I think there is no attempt with the Volcker Rule or other
    regulation to end that function.
        I think that the Volcker Rule is intended to constrain
    certain highly risky activities, at least in the part of the
    financial system that has direct and indirect support from the
    Federal Government and the taxpayer. So in that regard, it is a
    reasonable rule.
        I think that the Volcker Rule, given a close look at the
    evidence, has done very little harm and actually seems to have
    left liquidity and market making in at least as good a shape as
    it was before the implementation of that Rule.
        Maybe I could take a moment here to speak about the 2016
    Fed study that people have cited as evidence that under stress
    conditions, there is--
        Mr. Scott. What was that study? I'm sorry, I didn't--
        Mr. Jarsulic. In 2016, there was a Federal Reserve staff
    paper which looked at the effect of downgrades in bond ratings
    and concluded that post-Volcker, the price effect of those
    downgrades was bigger. And they drew the implication from that,
    that markets were less able to react to stress.
        Mr. Scott. I want to get to Mr. Kruszewski, too--
        Mr. Jarsulic. Okay.
        Mr. Scott. --in the next 40 seconds. What is your take on
    this?
        Mr. Kruszewski. First of all--
        Mr. Scott. Where am I going right or wrong on this?
        Mr. Kruszewski. First of all, if you want to limit the
    risks of the banks, then tell them not to make loans. That is
    where the biggest risk is. Let's look at the loan book. That is
    where the financial crisis has its roots was in the loan book.
        There was no trading desk at Fannie Mae and Freddie Mac or
    Countrywide. There are no trading desks. All right? What you
    are talking about here, capital rules will and are proper to
    limit the risk on the banks.
        What the Volcker Rule is trying to deal with is the short-
    term trading and the mechanism to provide liquidity so that you
    have the efficient raising of capital, primarily for small
    companies.
        And this rule limits my firm, and I don't--with all due
    respect to all the studies that are going on here, I run a firm
    that tries to make markets in compliance with the Volcker Rule.
    And I will tell you that our ability to do so has been
    significantly impacted, raising the cost of capital for
    companies that are creating jobs in this country.
        Mr. Scott. All right. Thank you very much.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes the gentleman from Arkansas, Mr. Hill,
    for 5 minutes.
        Mr. Hill. Thanks, Mr. Chairman. Thanks for convening this
    important hearing.
        And I was struck by my former colleague Governor Powell's
    statement that what the current law and rule do is effectively
    force you to look into the mind and heart of every trader on
    every trade to see what the intent is. And so I wonder, does
    Stifel have Ouija Boards on their trading desk? Because that
    was one of my favorite games as a kid, to ascertain the intent
    of everyone.
        But seriously, do you believe that when you have a rule
    that is this complex that it is just almost too difficult to
    comply? My experience in the financial services industry is
    that when you have a rule, your compliance officer and your
    general counsel walk back from that rule in order to be even
    more conservative so there is no foot fault on what has already
    become a super complex issue.
        So what is Stifel's worry about that? And every day how do
    you ascertain Mr. Himes' idea of 700 cars versus 120? How do
    you try to do that daily?
        Mr. Kruszewski. From my perspective at Stifel, you cannot
    do that, because what my compliance and general counsel tell me
    is that the evaluation of what was in the mind of the trader
    will be questioned with the benefit of hindsight.
        And so it is like going to the car dealer who wanted 100
    cars and he only sold 30. Then he must have prop-traded on the
    other 60, but at the time that he bought the 70, he had full
    intentions of selling 100.
        Mr. Hill. Yes.
        Mr. Kruszewski. Any rule that tries to, as Governor Powell
    says, get into the minds of a trader, is simply not workable.
        Mr. Hill. Yes. I really think that this sort of thing of
    that daily trading work is really best handled by strict
    capital and liquidity rules and not trying to carve out
    something unique. I just think it is--Potter Stewart couldn't
    figure it out, so I am sure we can't.
        My next question is, if proprietary trading has no social
    good or value in creating liquidity and creating markets, then
    why does Congress exempt U.S. obligations and those of States
    and municipalities from proprietary trading? I am missing
    something.
        Tom Quaadman, do you want to take that question?
        Mr. Quaadman. That is a very good question, because if you
    take a look at the Volcker Rule, if you take a look at Basel
    III, if you take a look at a number of other rules, U.S.
    Treasuries are always exempt. And as I was talking to a
    corporate treasurer, he said the impact of all these rules, at
    the end of the day, to their logical outcome, is companies are
    going to have to put their financial resources into U.S.
    Treasuries.
        And what we have seen over the last several years is a
    chronic shortage in U.S. Treasuries, as well as stresses in
    those markets.
        Mr. Hill. I have also heard from community banks.
        And I wonder, Ron, your comments on this. Community banks
    are saying they had to sell off profitable businesses and
    investments because of the Volcker Rule. And I think Congress,
    back in 1958, specifically said you can invest 5 percent of
    capital and surplus in small business investment corporations
    (SBICs).
        And I don't think anyone has criticized that for almost 60
    years now, using just a simple, ``can for'' test to invest in
    small and intermediate lending, to enhance net interest margin,
    to have some diversification at bank and bank holding
    companies. And yet, I think people are divesting similar
    investment funds in which they are not sponsoring--they are
    just simply a passive investor.
        Have you seen community banks divest at the holding company
    or bank level where they have just made a passive investment
    in, say, a community bank fund sponsored by your firm?
        Mr. Kruszewski. Again, it goes--
        Mr. Hill. Yes, all because of Volcker, right--
        Mr. Kruszewski. Totally.
        Mr. Hill. --because there is a perceived problem that they
    might--
        Mr. Kruszewski. This deals with the complexity of the
    covered fund rule in Volcker and what is permissible or not
    permissible. Again, this is--
        Mr. Hill. Is that something that we should pay specific
    attention to in what we are doing? I know we are proposing to
    repeal the Volcker Rule. But in terms of a nuance, can you talk
    a little bit more about that for--
        Mr. Kruszewski. I think if you are going to modify Volcker,
    you need to look at the covered rule. I think, Mr. Blass, that
    is what your testimony was about in many ways. And so we have
    to look at that.
        Mr. Blass. Yes.
        Mr. Hill. Mr. Blass?
        Mr. Blass. I agree entirely. The covered fund definition is
    very confusing. The regulators seem to be targeting hedge fund,
    private equity-type activity. But they over-included and
    included some very different types of activity.
        I have an example in our written testimony about tender
    offer bonds, which are a very simple mechanism for holding
    municipal securities, just holding them in a bank trust. And
    banks have no longer been able to sponsor those in many
    different sectors.
        Mr. Hill. Good. Thank you for that testimony.
        Thank you, Mr. Chairman.
        Chairman Huizenga. The gentleman's time has expired.
        With that, I don't see any Members on the other side of the
    aisle, so I will go to Mr. Emmer from Minnesota for 5 minutes.
        Mr. Emmer. Thank you, Mr. Chairman.
        And thanks to the witnesses for being here today. I
    appreciate your time.
        Last Congress, I understand this committee received
    testimony from a number of market professionals about the
    current impacts of regulation on fixed income market liquidity.
        One of the witnesses in one in these hearings in the last
    Congress stated that the net effect of post-crisis regulations
    is to ``remove productive capital out of the real economy and
    leave it stranded in government securities.''
        And I think I will start with Mr. Kruszewski. Do you
    believe the U.S. economy is already experiencing these impacts
    in this real economy, even though many of these regulations are
    still being implemented?
        Mr. Kruszewski. Yes, although I do want to say that the
    capital rules and many of the Rules that were focused on
    raising capital and liquidity in the banks were well-thought-
    out and done well. And I don't want to suggest that that is not
    the case.
        But I do want to say that there are a lot of rules that
    need to be relooked at, which is what I think this committee is
    doing in looking at Dodd-Frank. And specifically, the Volcker
    Rule is an example where the financial system in any
    capitalistic society has the requirement to provide liquidity.
    And this Rule significantly hampers that.
        And when you pull capital out of an economy, you are going
    to--the U.S. Government market doesn't need the liquidity. It
    is the largest market in the world. It has liquidity almost by
    definition. To exempt Volcker from it, I almost smiled at,
    because it doesn't need liquidity. My clients need liquidity.
    My clients who are trying to raise capital need liquidity. And
    Volcker sucks liquidity from those clients.
        Mr. Emmer. It is actually access to capital that we are
    talking about. And I go back a couple of questioners. The
    reason I put this to you first is you said it is making capital
    more expensive and harder to achieve for your clients, access
    to capital.
        And I go back to my question, in your experience, is this
    having an impact on our real economic growth?
        Mr. Kruszewski. Well, if you can't raise capital, you are
    not going to invest and have CAPEX, and you are not going to
    create jobs.
        And what I see is many companies, smaller companies today--
    and I think this committee should take note that many small
    companies today do not go public, do not have access to the
    capital markets in an efficient manner, and ultimately exit by
    selling themselves to their larger competitors. I note that in
    my testimony.
        Mr. Emmer. Right.
        Mr. Kruszewski. And I believe that the health and vibrancy
    of the U.S. economy requires that our market structure and the
    Rules that we put in place, which has significantly impacted
    the ability to raise capital and has impacted job formation,
    needs to be looked at and needs to be looked at post-haste.
        Mr. Emmer. Mr. Quaadman, I want to take this a little bit
    further, because my colleague, French Hill, worked on the
    banking side of it. And he was making sure that he could make
    that accessible to his customers, his clients.
        I am on the business side of it, and you are, too. You are
    representing all kinds of businesses. And we have this anemic,
    that some people want to celebrate, 2 percent or less annual
    economic growth. It is pathetic.
        When you look at this situation, if you start to get five
    agencies implementing this rule that is so complex that people
    who are experts in it even have trouble applying it and knowing
    what their liability might be, what do you think the impact has
    been on the economic growth in this country?
        Mr. Quaadman. It has had a negative impact. And as we
    outlined in the Thacker study, this does have impacts on
    capital spending and the like.
        But let me give you one example. I talked to a corporate
    treasurer and he described for me a few years ago that he had
    to go in the day after Thanksgiving. He had to sell commercial
    paper in order to pay bills for the company.
        Obviously, it was a slow trading day. The bank comes back
    at the end of the day and says, we were only able to sell half
    the commercial paper, but here is the full amount, and we
    aren't going to be able to sell the rest. So the bank took on
    the risk. His point was that post-Volcker, that transaction
    does not happen.
        Mr. Emmer. Right.
        Mr. Quaadman. The bank doesn't want to engage in that. The
    company can't engage in that capital in that way. And actually,
    that lack of sale of commercial paper takes money out of the
    productive economy. So they have to operate on a much longer
    time horizon and then much more inefficiently as well.
        Mr. Emmer. So it has had a real impact on our economic--
        Mr. Quaadman. Yes.
        Mr. Emmer. --growth. Thank you very much.
        I see my time has expired.
        Chairman Huizenga. The gentleman's time has nearly expired.
        With that, we will go to Mr. Davidson from Ohio for 5
    minutes.
        Mr. Davidson. Thank you, Mr. Chairman.
        And thanks, Mr. Quaadman. I really think Mr. Emmer asked a
    good question. It was going to be one of my first in the queue,
    what are real-world examples of how this is affecting
    businesses?
        And so, in the background, it is easy to see how the
    regulatory state and the regulatory environment are impacting
    access to capital, from what you just described in the bond
    market.
        I am curious if anyone on the panel has a similar example
    in currency markets, is a lot of the things along with the
    regulatory environment with Volcker combined with the currency
    markets has affected that.
        A lot of examples we talk about, this London Whale issue
    and things like that, but currency markets is another important
    way for things to clear. It is a highly liquid market. How is
    Volcker impacting it?
        Mr. Quaadman. I think there are a number of different
    impacts there. And, obviously currency trading is integral for
    the ability of our members to trade overseas and to do overseas
    deals. And that is much more difficult.
        And the reason why I was raising some of the other rules is
    when you also take the foreign bank operations rule, it has
    also retreated those banks from being a liquidity provider here
    in the U.S. and also to act as a counterpart in currency
    trades.
        But I think we have to also look at some of these other
    rules in conjunction with Volcker because, as I said, they do
    all sort of combine at the corporate treasurers' desk and have
    made their life more difficult their ability to service the
    company more inefficient.
        Mr. Davidson. Thank you.
        I am curious, on the bank regulatory side, when you are
    looking at how the banks are being assessed, there are four
    agencies that--or at least four as of this writing here--are
    charged in a 94-word sentence on page 247 with working together
    to enforce that.
        And just some real-world examples, if you could, about how
    well is that working?
        Yes, please?
        Mr. Blass. I would be happy to volunteer one. The agencies
    are required to work together even to issue guidance that is
    helpful to the industry or needed by the industry to make the
    Rule work.
        In our example, we had a rule that seemed to prohibit new
    fund launches using seeding capital from fund managers that are
    affiliated with banks. It took the agencies 3 years to work
    together to ultimately issue that guidance just a week or two
    before the Rule went into compliance. That causes all kinds of
    disruption to a business, as you might imagine.
        Mr. Davidson. Of course.
        Mr. Blass. For our industry, that is a critical function,
    being able to launch new funds, so it was very disruptive.
        Mr. Davidson. Yes, and so you put those things together,
    whether it is the supply or the demand of the service that
    banks provide, how is that affecting the market today? How
    would the future be better today with or without Volcker?
        And I will just ask Mr. Jarsulic?
        Mr. Jarsulic. Sorry. If your question is how would the
    economy be functioning without Volcker, I think that if you
    look at the evidence on the effectiveness of market making, on
    the statistical measures of liquidity in the secondary markets,
    I think that the Volcker Rule has not done any damage. And, in
    fact, it has preserved the good functioning of those markets.
        And at the same time, we have managed to make our banking
    system a bit safer because we have blocked off a source of
    potential tail risks to the banks that in the past were
    engaging in proprietary trading.
        Mr. Davidson. Okay. So thanks--
        Mr. Jarsulic. So I think that there is an overall gain from
    this. Rather than--
        Mr. Davidson. Okay. So your take is is that the markets are
    addressing the need in other ways. And I guess I would ask,
    down the way--
        Mr. Jarsulic. No, no, I am not--
        Mr. Davidson. Professor Whitehead, perhaps, your
    perspective on how accurate that is?
        Mr. Whitehead. Yes, sure. The Fed report actually indicates
    that roughly 93 percent of the market making activity that was
    taking place pre-Volcker was done by large banks that are no
    longer available because of Volcker; they are now pulling back.
        And so the question is whether or not hedge funds,
    insurance companies, mutual funds, and other sort of non-
    Volcker broker dealers are stepping in. And the Fed report
    directly addresses this and suggests that it is not happening,
    that you are seeing a drop in liquidity notwithstanding the
    expectation that there might be some backfilling.
        Mr. Davidson. Thank you. My time has expired.
        Chairman Huizenga. The gentleman's time has expired.
        The gentleman from Illinois, Mr. Foster, is recognized for
    5 minutes.
        Mr. Foster. Thank you, Mr. Chairman. And I would like to
    yield my time to my colleague from Connecticut, Mr. Himes.
        Mr. Himes. I thank the gentleman from Illinois. And again,
    thank you all for being here. In my previous round of questions
    I think I can conclude that there wasn't a lot of appetite for
    the idea of permitting depository institutions to take
    proprietary bets.
        I think we went through long term and short term, and I
    didn't sense a lot of enthusiasm for that or for investment in
    hedge fund vehicles.
        A repeal of the Volcker Act, of course, would allow that to
    happen. So I want to get behind an issue here that I think is
    really interesting and hopefully you can help us with. There is
    ambiguous data, and we are hearing if from the panel today,
    about whether the Volcker Rule is, in fact, compromising
    liquidity in the markets.
        There is not a lot of ambiguity around whether the markets
    are healthy. New issuance is high. We have some question about
    whether smaller issues are affected.
        But let me ask this and I will ask it of anybody. I get
    frustrated in these conversations because the premise is there
    is not enough liquidity, or there is not enough credit
    availability, or there are not enough IPOs happening. So let me
    just ask this as a starter question.
        Is more liquidity always good? Is there some--let me put it
    this way. Is there some optimal level of liquidity above which
    the system becomes risky, below which capital markets aren't
    functioning well?
        Mr. Kruszewski. Well, I can say liquidity comes at a price
    on either side. So liquidity comes at a price and you can argue
    that too much liquidity isn't good either in terms of just too
    much money flashing around. So liquidity comes at a price.
        But I do want to just say that when you talk about our
    long-term proprietary bet that we make at Stifel is to make a
    loan. That is our long-term proprietary bet. The short term
    that we are talking about here, in my opinion, is harmful. It
    takes away liquidity. So you are pricing liquidity too dearly
    with the Volcker role.
        Mr. Himes. No, and I understand that. I appreciate your
    business. Banks are in the business of making loans. They are
    arguably not in the business of making other proprietary bets.
        And to your point, I am not dismissing your statement.
    There are others. I have a letter here from Vanguard that says
    that it has had no problem finding liquidity in counterparties
    in the market.
        So I guess let me come back to my question, which is a very
    serious question because it should inform what we are doing
    here. I think most would agree that infinite liquidity is not a
    good thing. And therefore, there is some optimal level of
    liquidity.
        Too little is not good. Too much is not good either. So I
    am looking--no one up here can say there is not enough
    liquidity in the market unless they can also say here is the
    optimal level.
        So I am just looking for help from anybody in terms of, how
    will we know when there is optimal market liquidity? Because if
    we don't answer that question, none of the statements about
    there is too little or there is too much mean anything. So help
    us establish what the optimal--how we will know if we are at an
    optimal market liquidity level?
        Mr. Kruszewski. All I will say is that the market will get
    to the optimal level. You won't get to the optimal level
    through regulation.
        Mr. Himes. I was a banker for a long time. And oftentimes
    when the market forces have been most active, there has been
    too much liquidity and catastrophe that followed. This goes
    back to the South Sea bubble hundreds of years ago. So I am not
    sure I buy that premise.
        But, again, and let me actually single out Professor
    Whitehead, because this is a pretty academic question, none of
    our statements about whether we have too much or too little
    liquidity mean a darn thing unless you can anchor me in some
    concept of optimal liquidity. So how do we do that?
        Mr. Whitehead. Sure. So again, I will take you back to the
    Fed report, which I think tries to do just that. They are
    taking a look at the BB index. They are looking at that as the
    baseline. And then they are looking at instruments that drop in
    credit value down from whatever they were down to something
    that is near BB.
        And what they are doing is comparing the two. And they are
    saying, well, look this BB we look at it pre-Volcker and post-
    Volcker. And that is our baseline.
        Now let's see what happens when we have this decline, which
    is really sort of a gauge for stress. And what we see in that
    instance? There is a pullback. So that is your baseline, right?
    Your baseline--
        Mr. Himes. A pull back from when, though?
        Mr. Whitehead. A pull back relative to what you see in
    terms of pre-Volcker versus post-Volcker.
        Mr. Himes. Yes, yes. The pre-Volcker--none of us want to go
    back to 2008, right? Where I would argue you had a surplus of
    liquidity, so again--
        Mr. Whitehead. What I am saying is the baseline isn't pre-
    imposed. The baseline is the BB which is pre-imposed. In other
    words, they are taking a look at the stress analysis both
    before Volcker and after Volcker relative to a baseline that is
    a below investment grade, index, these BB instruments.
        And so the idea, as I was saying earlier, it is not a
    question of absolute. It is a question of relative liquidity.
    And so they are trying to judge whether or not as a result of
    Volcker you see this decline relative to this, again, baseline
    of BBs. So your baseline kind of would be, maybe not optimal,
    but certainly some sense of what we are looking at independent
    of this drop in credit quality.
        The drop in credit quality is kind of this way to estimate
    what happened during the financial crisis. And what they see is
    is that as a result of the drop relative to this baseline of BB
    instruments that you actually see a pullback in terms of
    liquidity.
        So I think it is hard to sort of pinpoint a number, which
    is what you are looking for, I think, or some optimal number.
    And I believe that is what the testimony before was really
    getting at in terms of the market, that you are not going to
    have an optimal number.
        But what I think you can do is gauge it relative to other
    indices like they do in the Fed report. And that is why they
    conclude that in times of stress you do see this problem. Or
    you are likely to see this problem, again, relative to this
    more standardized BB index.
        Mr. Himes. Thank you very much. I appreciate it.
        Thank you, Mr. Chairman.
        Chairman Huizenga. The gentleman's time has expired.
        I now recognize the gentleman from Indiana, Mr.
    Hollingsworth, for 5 minutes.
        Mr. Hollingsworth. Good morning. Thanks, everybody, for
    being here. I have really appreciated the testimony this
    morning.
        And specific to Mr. Kruszewski, I certainly appreciate your
    healthy, and I think very warranted, skepticism for government
    solutions being promulgated on business.
        I often think back about a quote somebody gave me which is,
    ``If you think our problems are bad, just wait until you see
    our solutions.'' And I frequently think of this with regard to
    government, and specifically with regard to this.
        Can you help me better understand, because I think there is
    some misunderstanding about the cause of the crisis. And when I
    think about the cause of the crisis, I think about loan books.
    I don't think about prop trading desks. I think about the risks
    that were taken on those books. So I guess for you Mr.
    Kruszewski, can you tell me a little bit about what you felt
    like caused the crisis?
        Mr. Kruszewski. Yes. I will add to the 100 books--
        Mr. Hollingsworth. Yes.
        Mr. Kruszewski. --that have tried to explain the crisis.
    The crisis is interesting. Simply, you take leverage and you
    take loans and you combine rating agencies and misconceptions
    of a whole bunch of things and you package them together. And
    when the house came apart it came apart big. And it is that
    simple.
        Mr. Hollingsworth. Okay. And when these banks were making
    these bets on mortgages, they are inherently taking certain
    risk. And my colleague, Mr. Himes, talks about those being of
    lesser risk. But they are inherently taking long term bets both
    on interest rate and credit risk, right?
        The typical residential mortgage is 30 years in this
    country. And so, when we talk about short-term proprietary
    trading versus long term proprietary trading, the reality is on
    a loan book there is real risk, and real long-term risk if that
    is not--
        Mr. Kruszewski. I think it is important that in any
    capitalistic society that when you have a crisis, the financial
    system will be in the middle of it, because the financial
    system is an intermediary and it provides loans and crises will
    come out of leverage and loans.
        And so on one hand you can simply almost eliminate that if
    you de-risk the system--
        Mr. Hollingsworth. Right.
        Mr. Kruszewski. --and just make no more loans. You are not
    going to have a crisis. But we need loans and we need good
    capital rules.
        To address, just quickly, the one question, what is too
    much liquidity? What I would say to that, and I think it is
    important, is that we have had a fire hose running one way for
    about 4 years where tremendous liquidity has come into the
    system through the issuance of corporate debt because interest
    rates are low. It is a policy issue. That is about to reverse.
    You are not going to see that. And you are going to see
    potentially the other way.
        And that is why we need the ability to have a functioning
    market to balance when the liquidity runs the other way,
    because issuing corporations are not going to buy back their
    debt.
        Mr. Hollingsworth. Right.
        Mr. Kruszewski. It is going to need to be replaced.
        Mr. Hollingsworth. And just one final point on that. When
    you think about crises, and especially crises where significant
    price drops are very acute, I don't think about there being too
    much liquidity in those moments.
        In fact, I think about there being too little. A ready
    number of sellers and too few buyers and too few opportunities
    to offload it. That is what accounts for gaps downward in
    price.
        So when my friend says these crises may be on account of
    too much liquidity, I think the significant constraint in that,
    especially in this momentary passing of crises, is often too
    little liquidity and an inability to find enough ready-made
    buyers or sellers. Is that generally the concept of what
    happens in the middle of a crisis?
        Mr. Kruszewski. You can argue that too much liquidity goes
    into the asset and there is not enough liquidity to buy it
    back.
        Mr. Hollingsworth. Right.
        Mr. Kruszewski. So there is--liquidity is a funny thing.
        Mr. Hollingsworth. Yes.
        Mr. Kruszewski. And I would just say that if we were
    sitting here today with 2 percent GDP growth, not even 2
    percent GDP growth, and we were debating how to put market
    structure and regulations in place to drive economic growth, to
    get jobs going, and to do a number of things, the Volcker Rule
    would have no chance of passing under that basis. And that is
    why I sit here today is that for that same reason it needs to
    be repealed.
        Mr. Hollingsworth. Right. Thank you so much. I appreciate
    it.
        I yield back the balance of my time.
        Chairman Huizenga. Will the gentleman yield to the Chair?
        Mr. Hollingsworth. I will.
        Chairman Huizenga. All right. Because I want to actually
    amplify this, and Professor Whitehead, I am curious because as
    I was writing down, and I think Mr. Kruszewski had a figure of
    how many points increase that he thought that Volcker was
    costing in this environment, but I can't recall exactly what
    that number was.
        But the real question I have is what happens when interest
    rates go up? And what is going to happen? Is the Volcker Rule
    going to cause an even tighter situation?
        Mr. Whitehead. Well, that is the concern, that the Volcker
    Rule, because of the pullback from making a market, sort of
    secondary liquidity, is going to cause investors to be more
    reluctant to invest because they are not quite sure where to
    offset.
        It is the point that Mr. Kruszewski was just making a few
    moments ago. And as a result the cost of raising capital will
    go up as well. Not knowing what the risk is that I am going to
    take as an investor, I am going to expect a little bit more in
    anticipation of the risk of not being able to sell.
        Chairman Huizenga. All right. The gentlemen's time has
    expired.
        With that, the Chair recognizes the gentleman from
    California, Mr. Sherman, for 5 minutes.
        Mr. Sherman. Mr. Chairman, as we explore the Volcker Rule,
    we have five excellent witnesses here, but I would like to
    bring to the attention to the subcommittee four witnesses who
    aren't here.
        The first is President Barack Obama who said, ``The Volcker
    Rule will make it illegal for firms to use government-insured
    money to make speculative bets that threaten the entire
    financial system and demand a new era of accountability from
    CEOs who must sign off on their firm's practices. Our financial
    system will be safer, and the American people are more secure
    because we fought to include this protection in the law.''
        Now, the fact that President Obama would support the
    Volcker Rule is not surprising. But here are three other
    witnesses. Our own chairman of the full Financial Services
    Committee, Chairman Jeb Hensarling, in March 2013 said,
    ``Certainly we have to do a better job of ring-fencing,
    firewalling, whatever metaphor you want to use between an
    insured depository institution and a non-insured investment
    bank.''
        But the Speaker of the House was even more clear when he
    said, ``If you are a bank and you want to operate like some
    non-bank entity, like a hedge fund, then don't be a bank. Don't
    let banks use their customers' money to do anything other than
    traditional banking.'' That is the Speaker of the House in May
    2012.
        And finally, our Treasury Secretary Steve Mnuchin, ``I do
    support the Volcker Rule. I think the concept of proprietary
    trading does not belong in banks with FDIC insurance.''
        Perhaps it would be great to have Jeb Hensarling, Paul
    Ryan, and the Secretary of the Treasury here as witnesses to
    talk to us at this subcommittee hearing about the Volcker Rule.
        Mr.--will you pronounce your last name for me, sir?
        Mr. Kruszewski. When you stumble, I know the question is
    coming to me.
        [laughter]
        Ronald Kruszewski.
        Mr. Sherman. What?
        Mr. Kruszewski. ``Kruszewski.''
        Mr. Sherman. ``Kruszewski.'' Those who authored Dodd-Frank
    gave enforcement powers to five different agencies, each with
    primary oversight over a different segment of the industry.
        Does your company have multiple regulators? Are they
    enforcing the Rule differently? In your experience, have the
    regulators coordinated with each other effectively?
        Mr. Kruszewski. I think the regulators do the best they
    can. But the fact is that the Federal Reserve comes in and they
    have a certain view. And the OCC comes in and they have a
    different view.
        They have different mandates on top of it. So obviously,
    you would expect me to say nothing other than to have five
    different agencies come in and interpret and enforce a rule, as
    a businessman I don't think it is a good idea.
        So are they well-intended? Yes, but the enforcement tends
    to be a race to the bottom and which makes me have to take the
    most conservative viewpoint as to what the most conservative
    interpretation of Volcker may be.
        Mr. Sherman. Yes. You used the term, ``race to the
    bottom.'' In some spheres that means a race to lower and lower
    and lesser and lesser regulation. But I think you mean to say
    it is a race toward tougher and tougher regulation because you
    have to comply with all five.
        Mr. Kruszewski. I keep thinking in terms of liquidity
    availability, so I apologize.
        Mr. Sherman. Okay.
        Mr. Jarsulic, it has been argued that prohibiting
    proprietary trading will hurt our banks as they compete with
    banks overseas. The European Commission recommended a version
    of the Volcker Rule for its largest banks and the U.K.
    government is adopting a similar proposal that pushes risky
    trades into separately capitalized ring-fenced entities.
        How relevant are the competitive concerns given that our
    major competitors are moving in a similar direction?
        Mr. Jarsulic. I think that the movements on the part of
    foreign regulators suggest that they, too, recognize the risks
    that are posed by proprietary trading and the effects that they
    can have on the operation of a banking system. And so I think
    that there is a reasonable probability that the business models
    of their banks will be similar to the business model of ours.
        But even if that were not true, I think it is important to
    calculate the risks that these kinds of activities pose to a
    banking system. And what we are looking for is a stable, sound
    banking system that doesn't produce extreme financial events.
        And the fact that our banks aren't participating in
    activities that other banks are, doesn't weigh all that heavily
    against that consideration.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the Chair recognizes the gentleman from New
    Jersey, Mr. MacArthur, for 5 minutes.
        Mr. MacArthur. Thank you, Mr. Chairman.
        Mr. Jarsulic made a point at the beginning in his opening
    remarks that excessive risk-taking had caused terrible damage
    and harm to people and to our economy. I don't think any of us
    would disagree with that.
        We watched as millions of people lost their homes, and
    millions of others lost their fortunes. Shareholders lost their
    fortunes, even modest ones. And then taxpayers ended up footing
    the bill.
        And unfortunately, often those three people are one and the
    same: the homeowner; the shareholder; and the taxpayer. They
    got hammered three times, and $10 trillion of wealth or more,
    disappeared.
        I guess the question that keeps coming back to me is--I
    wasn't here in Congress when all this debate about Dodd-Frank
    went on and the aftermath of that--does this Rule, this
    particular Rule, address any of that?
        And so I want to start by asking you each just a yes-or-no
    question, starting with Mr. Blass. Yes or no, does the Volcker
    Rule, in your opinion, address the fundamental causes of the
    crisis that brought it about in the first place?
        Mr. Blass. It is not clear at all to us that it does.
    Certainly for our industry it misses the mark widely.
        Mr. MacArthur. Mr. Blass, I am sorry because you haven't
    spoken much so I am sorry to cut you off, but I have a few
    other questions. Just a yes or a no for this one if you would?
        Mr. Blass. It seems to miss the mark widely.
        Mr. Jarsulic. I believe it addresses a part of the things
    that led to the financial crisis.
        Mr. MacArthur. You guys should run for Congress.
        Mr. Jarsulic. No.
        Mr. MacArthur. Yes or noes are hard to answer here, too.
        Mr. Quaadman. The answer is no.
        Mr. Whitehead. I will do what professors never do, one
    word, no.
        Mr. MacArthur. Thank you. Okay.
        Professor Whitehead, I want to follow up with you on
    something that you also said. I have never been a banker. I ran
    an insurance company and then I was a private equity partner.
    So that is sort of my view of some of these things.
        It seems to me that it doesn't really matter if banks do
    smart or dumb things from my perspective, as long as they don't
    do too many of them with other people's money, or worse yet,
    with leveraged assets, because that creates certain issues.
        Do you think there is a tipping point at which too much
    risk, taking too much risk as a bank holding company, or worse
    yet, taking too much leveraged risk does create risk of failure
    that can get out of control?
        Mr. Whitehead. I would respond in two respects. The answer
    is, yes, I do think there is a point where there is too much
    risk, although that tends to be addressed through things like
    leverage ratios and capital requirements.
        And secondly, keep in mind, the Volcker Rule extends beyond
    banks. It covers all bank affiliates as well. So a lot of the
    testimony, a lot of the quotes that I have heard from folks who
    speak in support of the Volcker Rule speak to the depository
    institutions. And again, you want to keep in mind, we are
    talking about non-bank affiliates also.
        Mr. MacArthur. And I think you make an excellent point. It
    seems to me that the emphasis ought to be on leverage ratios
    and capital requirements because then instead of people in
    government trying to control very fluid markets, and they are
    fluid; I was a businessman for decades. Things change by the
    day, and business people respond by the hour.
        So instead of having bureaucrats try to figure all that out
    and control it, it seems to me we would be better off creating
    the limitations that stop us from hitting that tipping point
    instead of trying to decide who can do what in the broadest of
    categories.
        And this gets to some remarks that my friend from
    Connecticut was asserting before that we are trying to march
    towards and manage some optimal liquidity level.
        If it exists, it doesn't exist for more than a moment. And
    I am convinced it doesn't exist. It is fluid. The markets are
    fluid. And what is optimal liquidity today may be different in
    a month.
        And so I think we have to think about this differently, and
    I would advocate, along with those that are saying this rule
    doesn't come close to addressing the issue, it is time to re-
    think how to manage risk without shutting down the providers of
    liquidity.
        And again, Professor Whitehead, I think you said in the
    beginning, capital markets have changed. I think about how I
    accessed capital at different points of my ownership of my
    company, and I think I accessed all manner of capital other
    than the pubic markets. Different things worked at different
    times. Let us not shut our banks down from participating in
    that.
        And with that, I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes the gentleman from Massachusetts, Mr.
    Lynch, for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman, and I thank the ranking
    member as well for holding this hearing. And I want to thank
    all of the witnesses here.
        Mr. Quaadman, you are here again. You spend more time
    before this committee than most of our members do.
        [laughter]
        But you are a very valuable witness, so we certainly
    welcome you again.
        Mr. Jarsulic, I read a study recently by the International
    Monetary Fund where the staff reported that 73 banks identified
    as systemically important by the Basel Committee on Banking
    Supervision; they said that these 73 banks account for two-
    thirds of global bank assets.
        And according to the study, they said these 73 institutions
    pose significant management challenges and are very difficult
    to regulate and supervise and would be extremely difficult to
    resolve in an orderly manner in the event of a failure.
        And so I am just wondering if Volcker went away, if the
    Volcker Rule went away, how much more difficult do you think,
    with this financial system and proprietary trading that would
    be brought back, sponsorship of hedge funds and other risky
    activity, how difficult would it be then operating without the
    Volcker Rule, in terms of keeping these banks out of trouble or
    resolving them in a tough situation?
        Mr. Jarsulic. I think that the Volcker Rule is intended to
    be a preventative measure, that is, to lower the probability
    that these banks are going to need to be resolved. And so from
    that point of view, I think it is positive. It contributes to
    lowering the difficulties caused by excessive risk-taking.
        Mr. Lynch. There is the unwinding part, too, here that I
    want you to speak to. We have evidence from the London Whale
    trading incident. And it was extraordinary that JPMorgan was
    involved in that. And apparently a lot of the trading involved
    overseas affiliates in London, and I imagine that would occur
    on a fairly common basis.
        Mr. Jarsulic. Yes. I now see your question. Big
    organizations are--large bank holding companies are
    extraordinarily complex institutions. I think the Federal
    Reserve did a study of our larger banks and found that they
    often had subsidiaries in the thousands. And those subsidiaries
    are, of course, located across jurisdictions.
        And it has been the case, I think, in the past that a lot
    of trading activity has been located--for U.S. banks has been
    located in foreign jurisdictions, such as London.
        And so the more that you allow that kind of complex and
    potentially loss-generating activity that often creates
    contracts, obligations, that involve many institutions if you
    go across borders and legal institutions, it does increase the
    difficulty of unwinding an institution should it fail. And that
    it could make it a more protracted process.
        Mr. Lynch. I read a Reuters article recently that Goldman
    Sachs was still seeking a 5-year extension to conform with the
    Volcker Rule for about $7 billion worth of private equity
    investments.
        And if Goldman Sachs can't get rid of those illiquid
    assets, I think the average bank would have extreme difficulty.
    This is 6 years now that they have been holding on to those
    illiquid assets.
        Let me just ask you generally, the idea that we are going
    to have insured institutions, FDIC-insured institutions out
    there engaged in proprietary trading and higher risk activity,
    it seems like a moral hazard that you are insuring people and
    inducing them to engage in risky activity when you are going to
    end up holding the bag possibly if they begin to go under?
        Mr. Jarsulic. Yes, as long as you allow those kinds of
    activities inside an institution which is either insured as a
    commercial bank unit would be, or in the case of widespread
    calamity implicitly insured, although I think the argument is
    the Dodd-Frank Act reduced that implicit insurance
    significantly is quite strong, the more likely they are going
    to be able to engage in those kinds of activities, the greater
    the risk they produce, the more willing it will be for their
    counterparties and funders to help them engage in that kind of
    activity.
        Mr. Lynch. Thank you very much, Mr. Chairman. I yield back
    the balance of my time.
        Chairman Huizenga. The Chair recognizes Mr. Poliquin from
    Maine for 5 minutes.
        Mr. Poliquin. Thank you, Mr. Chairman, very much, I
    appreciate the time.
        And I thank all of you gentlemen for being here today.
        Mr. Kruszewski, I know I am not pronouncing it right but it
    is close enough. Do you know who I mean? Okay? Good. I would
    like to ask you a question if I may?
        Last December, on the 22nd, the Fed released a research
    paper entitled, ``The Volcker Rule in Market Making in Times of
    Stress.'' And in that report, it states, ``We document--i.e.,
    the Fed staff--that the illiquidity of stressed bonds has
    increased after the Volcker Rule.
        ``Since Volcker-affected dealers have been the main
    liquidity providers, the net effect of these bonds are less
    liquid during times of stress due to the Volcker Rule.'' And
    they also talked about the performance of bonds during
    downgrades and so forth and so on.
        So my question to you, sir, is, do you agree, since you are
    in the business, that the Volcker Rule, in fact, has caused
    this problem? Did you agree with the findings of that report?
        Mr. Kruszewski. Yes.
        Mr. Poliquin. Okay. What do you think that means? What are
    the implications for our economy as a result of concluding that
    the Volcker Rule does cause illiquidity during times of stress?
        Mr. Kruszewski. Again, as I have said in my written and
    oral testimony, and I will say again, to the extent that the
    Fed is correct, and I believe they are correct that there is
    less liquidity, especially for these smaller bond issues. In
    very simple terms that just equates to higher cost to capital
    for our companies and our economy. And it is just that simple.
        So if you cannot--buyers are going to demand more
    compensation in terms of bonds. That means higher interest
    rates for the issuing company. That is higher cost to capital,
    less money for jobs and development.
        Mr. Poliquin. So specifically at a time of stress in the
    economy when business is poor and rates are already rising, you
    are saying this could cause rates to go up even further, and
    further choke off capital to small and medium size companies
    that are desperately in need of that capital?
        Mr. Kruszewski. I would not equate that report to rising
    interest rates per se. I think that is an economic phenomenon
    and that is what the Fed does. What they are saying, as I read
    that report, is that they see the illiquidity in times of
    stress.
        And what that means is, so do the people who buy those
    bonds see the illiquidity in times of stress. There will not be
    any buyers. And therefore, to compensate for that risk, they
    will increase the rates.
        Mr. Poliquin. Got it.
        Mr. Quaadman, if I may expand upon this please? Do you
    think as a result of this conclusion by the Fed that many of us
    are in agreement with, that that could pose the amalgamation of
    this problem on different parts of the economy--could pose
    systemic risk to the economy?
        Mr. Quaadman. I think it is definitely causing a drag on
    growth. The march towards stability without also having pro-
    growth measures in place has caused that drag.
        I do think, as I mentioned before, too, as we are seeing
    treasurers being forced to more and more put their cash into
    U.S. Treasuries, it is actually concentrating risk into another
    part of the financial sector.
        Mr. Poliquin. Mr. Whitehead, would you like to jump in here
    and comment on this, sir, before I ask another question?
        Mr. Whitehead. I think it is really the same point, which
    is as investors who are concerned about liquidity assess
    whether or not to make an investment, you would expect them to
    receive a higher return. And that has a real Main Street
    effect. It means the cost of raising capital goes up and that
    has a knock-on effect to what the businesses can do.
        Mr. Poliquin. If a company has a problem dealing with the
    Volcker Rule because it is a 1,000-page rule where you are
    reporting to five different agencies, as you mentioned, sir,
    and that book of business or that part of your book of business
    isn't performing as you expect it to, Mr. Kruszewski, could you
    also comment on what other types of activities that might be
    riskier might a bank be involved in as a result of this part of
    their book of business not performing?
        Mr. Kruszewski. I am not sure. I will try to answer your
    question. I believe that first of all, Stifel does not engage
    in proprietary trading. It is not something that is central to
    our business model. I am not talking my own book here.
        What I am suggesting is that the five agencies and the
    interpretation of the Rule, which is very complex, results in
    it being very difficult to make effective markets, especially
    in times of stress. What other firms are doing to compensate
    for that, I am not sure.
        Mr. Poliquin. Thank you, Mr. Chairman. My time has expired.
        And thank you, gentlemen, very much.
        Chairman Huizenga. The gentleman's time has expired.
        With that, I would like to thank our witnesses today for
    your testimony. This has been, I think, a very helpful
    conversation.
        And without objection, I would also like to submit for the
    record a letter from the National Venture Capital Association.
        Without objection, it is so ordered.
        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.
        Mrs. Maloney. Thank you. May I join you in thanking the
    witnesses?
        Chairman Huizenga. Please.
        Mrs. Maloney. I also want to thank you all for your
    testimony on what I think is a critical issue. And I wanted to
    just end with the quote that Mr. Hollingsworth said, ``If you
    think our problems are bad, wait until you see our solutions.''
        But the problem we tried to address with Volcker was the
    financial crisis that ended up costing this country $16
    trillion to $18 trillion, depending on what study you look at,
    thousands--millions of jobs and millions of homes.
        And basically Volcker just says that banks should not
    gamble with their customers' money, especially when that money
    is insured by the FDIC and backed up by the taxpayers. And so--
        Chairman Huizenga. And somewhere in there is a thank you to
    our witnesses?
        Mrs. Maloney. I did say--
        [laughter]
        I did say thank you, but--
        Chairman Huizenga. Okay. Well, with--
        Mrs. Maloney. --I do thank you. Thank you very, very much,
    really.
        Chairman Huizenga. With that, I again thank our witnesses,
    and our hearing is adjourned.
        [Whereupon, at 12:08 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 March 29, 2017

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