HFS Subcommittee Examines the Impacts of the Dodd -Frank Act
AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, members discussed the impacts of the Dodd-Frank Act with industry representatives from the financial services and business sectors.
In his opening remarks, Chairman Scott Garrett (R-N.J.) expressed concern that rules imposed by the Dodd-Frank Act are hindering economic growth. He presented several charts showing GDP, home value, and manufacturing declining after the passage of Dodd-Frank and argued that the cumulative effect of new regulations has confused and complicated the markets, stalling their recovery.
Full Committee Chairman Spencer Bachus (R-Ala.) said many believe that Dodd-Frank legislation is having negative effects on the economy, including placing “enormous” pressure on corporate balance sheets and making credit more expensive. In an effort to aid the recovery and combat the negative effects of Dodd-Frank, he said the Committee is considering legislation to ease the regulatory burden on businesses, but did not provide any specifics.
Rep. Stephen Lynch (D-Mass.) said the financial industry is struggling due to “loss of integrity and trust,” not from new regulations. Noting that households lost $19.2 trillion dollars in wealth during the crisis, he urged the Committee to focus on preventing another recession instead of maximizing growth at the expense of safety measures.
Rep. Edward Royce (R-Calif.) argued that Dodd-Frank complicated “too-big-to-fail” by increasing concentration in the banking sector and failing to consolidate regulatory and oversight bodies. He believes the legislation failed to increase investment and raised the cost of credit, making it easier for small firms to “fall prey” to larger ones.
Rep. Carolyn Maloney (D-NY) warned that “even thinking about repealing Dodd-Frank” is extremely irresponsible. She stressed the importance of financial reform in preventing another crisis, noting that markets run “more on trust than on capital.”
Reps. Michael Fitzpatrick (R-Penn.), Robert Hurt (R-Va.), and Robert Dold (R-Ill.) all discussed the importance of examining the unintended consequences of Dodd-Frank reforms and expressed concern that the legislation has slowed growth.
Testimony
In his oral testimony, Ken Bentsen, Executive Vice President of the Securities Industry and Financial Markets Association (SIFMA), focused his testimony on implementation of the Volcker Rule, credit risk retention, Title VII, and single counterparty credit limits. He expressed concern that the Volcker Rule draws an artificial distinction between permitted activities and proprietary trading and suggested a less hard-coded, more guidance-based approach. Bentsen also argued that the Premium Capture Cash Reserve Account (PCCRA) provision will reduce incentives for lenders to utilize securitization as a source of funding, change lenders’ origination practices, and increase the cost of borrowing.
Bentsen applauded the intent of Title VII derivatives regulation, but stressed the importance of performing cost-benefit analysis, and proper sequencing and phasing during implementation. Noting the discord between domestic and international OTC derivatives regulation, he called for harmonized rules for swaps. In closing, he expressed concern about the Federal Reserve’s single counterparty credit limit proposal, which he said would “needlessly reduce liquidity in the financial system and dampen economic activity.” He suggested a number of fixes, including making more high quality exemptions, allowing netting, permitting firms to use a “stressed version” of current models, or following a supervisory stress approach.
In his opening statement, Thomas Lemke, testifying on behalf of the Investment Company Institute (ICI), provided an overview of the effects Dodd-Frank legislation will have on registered funds. Noting that registered funds did not cause the financial crisis, he expressed concern that some regulations have unfair and unnecessarily adverse effects on such funds, including the Volcker Rule. Further, he opposed designating registered funds as Systemically Important Nonbank Financial Companies (SIFIs), and recommended that the Fed wait to implement enhanced prudential standards for SIFIs until SIFIs are designated.
Concerning risk retention, Lemke said some retention standards may not be appropriate for certain asset-backed securities (ABS), such as notes issued by asset-backed commercial paper and securities issued by municipal tender option bond programs. He believes that “actions taken in connection with investing in an ABS” by a registered fund affiliated with that ABS should be excluded from SEC proposed rules about conflicts of interest. Finally, he denounced the CFTC for using Dodd-Frank reform as a “pretense… for expanding its authority through unjustified regulation.”
In her testimony, Anne Simpson, Senior Portfolio Manager at CalPERS, highlighted the principles of “smart regulation” and pointed out several areas of Dodd-Frank that need further work. She said regulation needs to be complete and proportionate, keep pace with financial innovation, leave room for market players to exercise their “proper role and responsibilities,” ensure transparency, address conflicts of interest, and encourage further innovation. Simpson applauded steps regulatory agencies have taken thus far to implement Dodd-Frank reform and urged them to act swiftly to finalize rules. In closing, she expressed support for the Volcker Rule, risk retention, transparency in credit rating agencies, and corporate accountability.
In his opening statement, Paul Vanderslice, President of the Commercial Real Estate Finance Council, discussed the p negative effects Dodd-Frank legislation could have on commercial mortgage-backed securities (CMBS) and refinancing. He explained that although $2 trillion of the commercial mortgage debt is scheduled to mature over the next five years, traditional portfolio lenders are only capable of funding less than $2 billion per year of this demand. Noting that CMBS usually fills this funding gap, he said faltering economic growth and “complex and overlapping” sets of regulations have stalled a recovery in the CMBS market. In particular, he cited surveys indicating that PCCRAs will restrict credit availability and increase borrowing costs and argued that lack of diversification from insufficient CMBS products will adversely affect investors. Finally, he urged Congress to ensure regulators follow Congressional intent and perform cost benefit analysis when considering new regulations.
In his opening statement, Thomas Deas, Vice President and Treasurer, FMC Corporation, said the Dodd-Frank Act greatly affects Main Street, noting that his company uses OTC derivatives to hedge business risks. He said banks do not require FMC to post margin, which increases “certainty” in their transactions and expressed concern with the proposed Dodd-Frank margin requirements for end-users because fees diverted to margin accounts would sit untouched. He also said the Volcker Rule is overly complex in defining market making and propriety trading, and could reduce market liquidity and increase systemic risk. In closing, Deas said money market fund (MMF) reform could cause small, main street businesses to move investment from MMFs to large banks.
In his opening remarks, Tom Deutsch, Executive Director, American Securitization Forum (ASF), focused on some of the key macroeconomic challenges facing the private securitization markets in the face of current regulatory “headwinds.” He said ASF supports increased transparency in the securitization market and tailored risk retention, rating agency, and regulatory capital standard reforms. However, he said that Dodd-Frank has “unintended interactions” between several rules that have created different types of systemic risk and other rules that will effectively cripple markets, including PCCRAs, vague strategies for privatizing the mortgage market, and unique, complex requirements for securitization issuance in different countries. In closing, Deutsch expressed concern that the totality of securitization and mortgage market reforms will result in increased costs for securitization and lending markets, which will be passed on to consumers and borrowers in the form of higher borrowing rates.
In his opening statement, Dennis Kelleher, President and CEO of Better Markets, was highly critical of the financial services sector, specifically criticizing the sector’s adverse affect on job creation. He noted that the deregulation of the financial services sector in the late 1990’s and early 2000’s led to the biggest financial collapse since the Great Depression and said that “little has changed,” despite the passage of Dodd-Frank. In closing, Kelleher said banks’ current “complaints” about the Dodd-Frank Act are “without merit” and, if the Act’s regulations are not implemented, will leave taxpayers exposed.
Question and Answer
Garrett asked Kelleher if he believes that the Dodd-Frank Act is “without flaws.” Kelleher said nothing borne of the democratic process is flawless because compromise is inherent to the process, but said regulatory agencies must be given the appropriate resources to promulgate and implement regulation that fosters growth and protects taxpayers.
Garrett and Rep. Jeb Hensarling (R-Texas) asked Deutsch to comment on a recent report issued by Mark Zandi that said the cumulative impact of Dodd-Frank regulation will raise mortgage costs by “100 to 400 basis points.” Deutsch said the report only considered the effect of the premium capture provision of Dodd-Frank, not the entirety of the legislation, and said he has not seen a credible counter-point to Zandi’s conclusions. He added that PCCRA will effectively double the mortgage interest rate and, when the totality of Dodd-Frank regulation is considered, the mortgage interest rate “will more than double.” Bentsen agreed with Deutsch’s analysis, adding that the PCCRA provision alone with change the economics of mortgage origination drastically, the costs of which must be considered.
Garrett asked Vanderslice to comment on PCCRA. Vanderslice said PCCRA was a late addition to the Dodd-Frank Act and “the one big impediment” to a recovery in the CMBS market.
Hensarling asked Deutsch to comment on the effect of a subjective QM standard. Deutsch said that the members of his organization have determined that the costs of a subjective QM rule would be “too prohibitively high” to engage in mortgage origination “anywhere close to the line of a non-QM.”
Ranking Member Maxine Waters (D-Calif.) asked Deas what steps Congress should take to make the Dodd-Frank Act more effective. Deas restricted his comments to derivatives regulations, noting that certain regulations are affecting smaller, mainstream users of over-the-counter (OTC) derivatives that were not engaged in systemically risky activities. He said there should be an exemption for end users from “overly-broad” derivatives regulations and criticized the restrictiveness of other regulations, saying the “cure for these problems is worse than the problem.”
Rep. Rubén Hinojosa (D-Texas) asked Simpson if she believed the recent changes to Title VII will foster increased “transparency, accountability and stability in the OTC derivatives marketplace.” Simpson said CalPERS supports the current direction of derivatives regulation and accepts that there will be increased costs. “We view these [increased] costs as an investment in the safety and soundness of the market and will be a systemic benefit to us as an investor,” she said. Simpson added that regulators should not sacrifice good regulation for “perfect regulation,” and should instead focus on implementing new regulations quickly.
Hinojosa asked Kelleher how to prevent banks from manipulating markets. Kelleher said the best way to prevent market manipulation is to “fund regulatory agencies adequately.” He said banks know they are able to “out-maneuver” regulators because regulatory agencies do not have the appropriate technology or staff to keep up with their increasingly complex strategies.
Rep. Randy Neugebauer (R-Texas) noted that while much of the securities market has returned to pre-2008 levels, one area that has continued to struggle is automobile loans. He asked Deutsch if there is a risk retention exemption for qualified automobile loans. Deutsch said that although there is an exemption in the risk retention proposal, it is designed for mortgages and does not seem to translate well to automobiles. Following up, Neugebauer asked if private mortgage activity would increase if uncertainty was reduced and the competitive advantage of Fannie and Freddie’s government-backed guarantee was leveled. Deutsch replied that private market capital would return, but rates would be higher.
Neugebauer asked Bentsen to comment on other obstacles to a recovery in the mortgage market. Bentsen said Congress did not intend to include PCCRA in the original Dodd-Frank legislation and that both buy and sell sides feel it inhibits the mortgage bond market.
Rep. Brad Sherman (D-Calif.) asked Bentsen how to limit the risk of systemic failure without bailouts. Bentsen said Dodd-Frank created several safety measures in Titles I and II of the Dodd-Frank Act, including the establishment of a systemic risk regulator, the authority to impose capital standards, and OLA. He also stressed that the legislation repealed a provision that precludes the Federal Reserve from bailing out such institutions.
Reps. Gwen Moore (D-Wis.) and Mike Fitzpatrick (R-Pa.) asked Lemke and Kelleher to comment on Money Market Fund (MMF) reform, specifically asking about the effect of implementing a floating net asset value (NAV). Lemke said ICI believes the changes to MMFs implemented by the Securities and Exchange Commission (SEC) in 2010 have adequately addressed current concerns. He said retail and institutional investors do not favor a floating NAV because it is “highly complicated, unnecessarily burdensome, and will lead to a withdrawal of funds from these products.” Kelleher disagreed, saying there is no proof that the reforms implemented in 2010 are effective because they have not been tested by “a crisis or a run.”
Moore asked Kelleher to identify some of the unintended consequences of Dodd-Frank and asked for specific ways to correct these issues. Kelleher said Better Markets would like to see changes made to the Volcker Rule so that it is clearer and more faithful to the statute. He also identified issues with some of the derivatives provisions and the “too-big-to-fail area,” specifically highlighting problems with prudential standards under Section 165, OLA, and living wills.
Fitzpatrick asked Simpson if banks will impose Volcker Rule compliance costs on consumers. Simpson said the costs of the Volcker Rule will be borne by shareholders. She said high returns as a result of high risks are not sustainable, and the Volcker Rule properly manages this risk.
Royce advocated for adequate capital to protect taxpayers from systemically damaging events, especially because of the fallibility of other protections and difficulty in predicting bubbles and crisis. Kelleher said that there is no “silver bullet for policing the financial industry” and stressed the efficacy of multiple layers of protection, including strong capital standards. Royce also expressed concern that Dodd-Frank exacerbated the problem of “too-big-to-fail.” Kelleher said “too-big-to-fail” banks compete unfairly because of “public subsidies and support that pre-existed Dodd-Frank and have not been addressed after the crisis.”
Rep. Steve Stivers (R-Ohio) asked Bentsen how the Volcker Rule may impact job creation. Bentsen said the Oliver Wyman study on the impact of the Volcker Rule concluded that increased costs of corporate bond issuance will have a net-negative effect on corporate earnings, which will ultimately affect employment. He said SIFMA believes the regulators have misinterpreted Congressional intent concerning the Volcker Rule, leading to widespread criticism of the promulgated proposal. He added that if the rule proceeds as proposed it will have a “very negative effect on U.S. financial markets.” Following up, Stivers asked Bentsen to comment on ways to make the rule more effective. Bentsen said there are a number of thing regulators can do to make the Volcker Rule more palatable and effective, including reversing the negative presumption, moving away from “hard-coded metrics,” and “acknowledging that customer-focused business fits within the market-making exemption.”
David Schweikert (R-Ariz.) said the residential mortgage market has become a government market and asked Deutsch if Dodd-Frank is preventing the private mortgage market from rebuilding. Deutsch said vague strategies for reforming the GSEs, implementing PCCRAs and promulgating QM definitions are contributing to this barrier. Bentsen added that the ongoing implementation of Basel 2.5 and Basel 3 is also weighing on the housing market.
For testimony and a webcast of the hearing, please click here.
AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, members discussed the impacts of the Dodd-Frank Act with industry representatives from the financial services and business sectors.
In his opening remarks, Chairman Scott Garrett (R-N.J.) expressed concern that rules imposed by the Dodd-Frank Act are hindering economic growth. He presented several charts showing GDP, home value, and manufacturing declining after the passage of Dodd-Frank and argued that the cumulative effect of new regulations has confused and complicated the markets, stalling their recovery.
Full Committee Chairman Spencer Bachus (R-Ala.) said many believe that Dodd-Frank legislation is having negative effects on the economy, including placing “enormous” pressure on corporate balance sheets and making credit more expensive. In an effort to aid the recovery and combat the negative effects of Dodd-Frank, he said the Committee is considering legislation to ease the regulatory burden on businesses, but did not provide any specifics.
Rep. Stephen Lynch (D-Mass.) said the financial industry is struggling due to “loss of integrity and trust,” not from new regulations. Noting that households lost $19.2 trillion dollars in wealth during the crisis, he urged the Committee to focus on preventing another recession instead of maximizing growth at the expense of safety measures.
Rep. Edward Royce (R-Calif.) argued that Dodd-Frank complicated “too-big-to-fail” by increasing concentration in the banking sector and failing to consolidate regulatory and oversight bodies. He believes the legislation failed to increase investment and raised the cost of credit, making it easier for small firms to “fall prey” to larger ones.
Rep. Carolyn Maloney (D-NY) warned that “even thinking about repealing Dodd-Frank” is extremely irresponsible. She stressed the importance of financial reform in preventing another crisis, noting that markets run “more on trust than on capital.”
Reps. Michael Fitzpatrick (R-Penn.), Robert Hurt (R-Va.), and Robert Dold (R-Ill.) all discussed the importance of examining the unintended consequences of Dodd-Frank reforms and expressed concern that the legislation has slowed growth.
Testimony
In his oral testimony, Ken Bentsen, Executive Vice President of the Securities Industry and Financial Markets Association (SIFMA), focused his testimony on implementation of the Volcker Rule, credit risk retention, Title VII, and single counterparty credit limits. He expressed concern that the Volcker Rule draws an artificial distinction between permitted activities and proprietary trading and suggested a less hard-coded, more guidance-based approach. Bentsen also argued that the Premium Capture Cash Reserve Account (PCCRA) provision will reduce incentives for lenders to utilize securitization as a source of funding, change lenders’ origination practices, and increase the cost of borrowing.
Bentsen applauded the intent of Title VII derivatives regulation, but stressed the importance of performing cost-benefit analysis, and proper sequencing and phasing during implementation. Noting the discord between domestic and international OTC derivatives regulation, he called for harmonized rules for swaps. In closing, he expressed concern about the Federal Reserve’s single counterparty credit limit proposal, which he said would “needlessly reduce liquidity in the financial system and dampen economic activity.” He suggested a number of fixes, including making more high quality exemptions, allowing netting, permitting firms to use a “stressed version” of current models, or following a supervisory stress approach.
In his opening statement, Thomas Lemke, testifying on behalf of the Investment Company Institute (ICI), provided an overview of the effects Dodd-Frank legislation will have on registered funds. Noting that registered funds did not cause the financial crisis, he expressed concern that some regulations have unfair and unnecessarily adverse effects on such funds, including the Volcker Rule. Further, he opposed designating registered funds as Systemically Important Nonbank Financial Companies (SIFIs), and recommended that the Fed wait to implement enhanced prudential standards for SIFIs until SIFIs are designated.
Concerning risk retention, Lemke said some retention standards may not be appropriate for certain asset-backed securities (ABS), such as notes issued by asset-backed commercial paper and securities issued by municipal tender option bond programs. He believes that “actions taken in connection with investing in an ABS” by a registered fund affiliated with that ABS should be excluded from SEC proposed rules about conflicts of interest. Finally, he denounced the CFTC for using Dodd-Frank reform as a “pretense… for expanding its authority through unjustified regulation.”
In her testimony, Anne Simpson, Senior Portfolio Manager at CalPERS, highlighted the principles of “smart regulation” and pointed out several areas of Dodd-Frank that need further work. She said regulation needs to be complete and proportionate, keep pace with financial innovation, leave room for market players to exercise their “proper role and responsibilities,” ensure transparency, address conflicts of interest, and encourage further innovation. Simpson applauded steps regulatory agencies have taken thus far to implement Dodd-Frank reform and urged them to act swiftly to finalize rules. In closing, she expressed support for the Volcker Rule, risk retention, transparency in credit rating agencies, and corporate accountability.
In his opening statement, Paul Vanderslice, President of the Commercial Real Estate Finance Council, discussed the p negative effects Dodd-Frank legislation could have on commercial mortgage-backed securities (CMBS) and refinancing. He explained that although $2 trillion of the commercial mortgage debt is scheduled to mature over the next five years, traditional portfolio lenders are only capable of funding less than $2 billion per year of this demand. Noting that CMBS usually fills this funding gap, he said faltering economic growth and “complex and overlapping” sets of regulations have stalled a recovery in the CMBS market. In particular, he cited surveys indicating that PCCRAs will restrict credit availability and increase borrowing costs and argued that lack of diversification from insufficient CMBS products will adversely affect investors. Finally, he urged Congress to ensure regulators follow Congressional intent and perform cost benefit analysis when considering new regulations.
In his opening statement, Thomas Deas, Vice President and Treasurer, FMC Corporation, said the Dodd-Frank Act greatly affects Main Street, noting that his company uses OTC derivatives to hedge business risks. He said banks do not require FMC to post margin, which increases “certainty” in their transactions and expressed concern with the proposed Dodd-Frank margin requirements for end-users because fees diverted to margin accounts would sit untouched. He also said the Volcker Rule is overly complex in defining market making and propriety trading, and could reduce market liquidity and increase systemic risk. In closing, Deas said money market fund (MMF) reform could cause small, main street businesses to move investment from MMFs to large banks.
In his opening remarks, Tom Deutsch, Executive Director, American Securitization Forum (ASF), focused on some of the key macroeconomic challenges facing the private securitization markets in the face of current regulatory “headwinds.” He said ASF supports increased transparency in the securitization market and tailored risk retention, rating agency, and regulatory capital standard reforms. However, he said that Dodd-Frank has “unintended interactions” between several rules that have created different types of systemic risk and other rules that will effectively cripple markets, including PCCRAs, vague strategies for privatizing the mortgage market, and unique, complex requirements for securitization issuance in different countries. In closing, Deutsch expressed concern that the totality of securitization and mortgage market reforms will result in increased costs for securitization and lending markets, which will be passed on to consumers and borrowers in the form of higher borrowing rates.
In his opening statement, Dennis Kelleher, President and CEO of Better Markets, was highly critical of the financial services sector, specifically criticizing the sector’s adverse affect on job creation. He noted that the deregulation of the financial services sector in the late 1990’s and early 2000’s led to the biggest financial collapse since the Great Depression and said that “little has changed,” despite the passage of Dodd-Frank. In closing, Kelleher said banks’ current “complaints” about the Dodd-Frank Act are “without merit” and, if the Act’s regulations are not implemented, will leave taxpayers exposed.
Question and Answer
Garrett asked Kelleher if he believes that the Dodd-Frank Act is “without flaws.” Kelleher said nothing borne of the democratic process is flawless because compromise is inherent to the process, but said regulatory agencies must be given the appropriate resources to promulgate and implement regulation that fosters growth and protects taxpayers.
Garrett and Rep. Jeb Hensarling (R-Texas) asked Deutsch to comment on a recent report issued by Mark Zandi that said the cumulative impact of Dodd-Frank regulation will raise mortgage costs by “100 to 400 basis points.” Deutsch said the report only considered the effect of the premium capture provision of Dodd-Frank, not the entirety of the legislation, and said he has not seen a credible counter-point to Zandi’s conclusions. He added that PCCRA will effectively double the mortgage interest rate and, when the totality of Dodd-Frank regulation is considered, the mortgage interest rate “will more than double.” Bentsen agreed with Deutsch’s analysis, adding that the PCCRA provision alone with change the economics of mortgage origination drastically, the costs of which must be considered.
Garrett asked Vanderslice to comment on PCCRA. Vanderslice said PCCRA was a late addition to the Dodd-Frank Act and “the one big impediment” to a recovery in the CMBS market.
Hensarling asked Deutsch to comment on the effect of a subjective QM standard. Deutsch said that the members of his organization have determined that the costs of a subjective QM rule would be “too prohibitively high” to engage in mortgage origination “anywhere close to the line of a non-QM.”
Ranking Member Maxine Waters (D-Calif.) asked Deas what steps Congress should take to make the Dodd-Frank Act more effective. Deas restricted his comments to derivatives regulations, noting that certain regulations are affecting smaller, mainstream users of over-the-counter (OTC) derivatives that were not engaged in systemically risky activities. He said there should be an exemption for end users from “overly-broad” derivatives regulations and criticized the restrictiveness of other regulations, saying the “cure for these problems is worse than the problem.”
Rep. Rubén Hinojosa (D-Texas) asked Simpson if she believed the recent changes to Title VII will foster increased “transparency, accountability and stability in the OTC derivatives marketplace.” Simpson said CalPERS supports the current direction of derivatives regulation and accepts that there will be increased costs. “We view these [increased] costs as an investment in the safety and soundness of the market and will be a systemic benefit to us as an investor,” she said. Simpson added that regulators should not sacrifice good regulation for “perfect regulation,” and should instead focus on implementing new regulations quickly.
Hinojosa asked Kelleher how to prevent banks from manipulating markets. Kelleher said the best way to prevent market manipulation is to “fund regulatory agencies adequately.” He said banks know they are able to “out-maneuver” regulators because regulatory agencies do not have the appropriate technology or staff to keep up with their increasingly complex strategies.
Rep. Randy Neugebauer (R-Texas) noted that while much of the securities market has returned to pre-2008 levels, one area that has continued to struggle is automobile loans. He asked Deutsch if there is a risk retention exemption for qualified automobile loans. Deutsch said that although there is an exemption in the risk retention proposal, it is designed for mortgages and does not seem to translate well to automobiles. Following up, Neugebauer asked if private mortgage activity would increase if uncertainty was reduced and the competitive advantage of Fannie and Freddie’s government-backed guarantee was leveled. Deutsch replied that private market capital would return, but rates would be higher.
Neugebauer asked Bentsen to comment on other obstacles to a recovery in the mortgage market. Bentsen said Congress did not intend to include PCCRA in the original Dodd-Frank legislation and that both buy and sell sides feel it inhibits the mortgage bond market.
Rep. Brad Sherman (D-Calif.) asked Bentsen how to limit the risk of systemic failure without bailouts. Bentsen said Dodd-Frank created several safety measures in Titles I and II of the Dodd-Frank Act, including the establishment of a systemic risk regulator, the authority to impose capital standards, and OLA. He also stressed that the legislation repealed a provision that precludes the Federal Reserve from bailing out such institutions.
Reps. Gwen Moore (D-Wis.) and Mike Fitzpatrick (R-Pa.) asked Lemke and Kelleher to comment on Money Market Fund (MMF) reform, specifically asking about the effect of implementing a floating net asset value (NAV). Lemke said ICI believes the changes to MMFs implemented by the Securities and Exchange Commission (SEC) in 2010 have adequately addressed current concerns. He said retail and institutional investors do not favor a floating NAV because it is “highly complicated, unnecessarily burdensome, and will lead to a withdrawal of funds from these products.” Kelleher disagreed, saying there is no proof that the reforms implemented in 2010 are effective because they have not been tested by “a crisis or a run.”
Moore asked Kelleher to identify some of the unintended consequences of Dodd-Frank and asked for specific ways to correct these issues. Kelleher said Better Markets would like to see changes made to the Volcker Rule so that it is clearer and more faithful to the statute. He also identified issues with some of the derivatives provisions and the “too-big-to-fail area,” specifically highlighting problems with prudential standards under Section 165, OLA, and living wills.
Fitzpatrick asked Simpson if banks will impose Volcker Rule compliance costs on consumers. Simpson said the costs of the Volcker Rule will be borne by shareholders. She said high returns as a result of high risks are not sustainable, and the Volcker Rule properly manages this risk.
Royce advocated for adequate capital to protect taxpayers from systemically damaging events, especially because of the fallibility of other protections and difficulty in predicting bubbles and crisis. Kelleher said that there is no “silver bullet for policing the financial industry” and stressed the efficacy of multiple layers of protection, including strong capital standards. Royce also expressed concern that Dodd-Frank exacerbated the problem of “too-big-to-fail.” Kelleher said “too-big-to-fail” banks compete unfairly because of “public subsidies and support that pre-existed Dodd-Frank and have not been addressed after the crisis.”
Rep. Steve Stivers (R-Ohio) asked Bentsen how the Volcker Rule may impact job creation. Bentsen said the Oliver Wyman study on the impact of the Volcker Rule concluded that increased costs of corporate bond issuance will have a net-negative effect on corporate earnings, which will ultimately affect employment. He said SIFMA believes the regulators have misinterpreted Congressional intent concerning the Volcker Rule, leading to widespread criticism of the promulgated proposal. He added that if the rule proceeds as proposed it will have a “very negative effect on U.S. financial markets.” Following up, Stivers asked Bentsen to comment on ways to make the rule more effective. Bentsen said there are a number of thing regulators can do to make the Volcker Rule more palatable and effective, including reversing the negative presumption, moving away from “hard-coded metrics,” and “acknowledging that customer-focused business fits within the market-making exemption.”
David Schweikert (R-Ariz.) said the residential mortgage market has become a government market and asked Deutsch if Dodd-Frank is preventing the private mortgage market from rebuilding. Deutsch said vague strategies for reforming the GSEs, implementing PCCRAs and promulgating QM definitions are contributing to this barrier. Bentsen added that the ongoing implementation of Basel 2.5 and Basel 3 is also weighing on the housing market.
For testimony and a webcast of the hearing, please click here.