Press Releases

Witnesses Make Case for Repealing Volcker Rule


 

Washington, March 29, 2017 -

A Dodd-Frank Act regulation known as the Volcker Rule is harming the ability of American businesses to obtain affordable financing for long-term growth, witnesses told the Capital Markets, Securities and Investment Subcommittee on Wednesday.

Staff at the Federal Reserve also concluded that the Volcker Rule has detrimental impacts for the U.S. capital markets.  According to a Fed staff working paper released last December, “the net effect [of the Volcker Rule] is a less liquid corporate bond market.”

The Fed’s paper said, “Our main finding is that the Volcker Rule has a deleterious effect on corporate bond liquidity and dealers subject to the Rule become less willing to provide liquidity during stress times.”

“Hardworking Americans rely on the capital markets to save for everything from college to retirement,” said Chairman Bill Huizenga (R-MI). “We as Congress must act to eliminate the burdensome and unnecessary regulations such as the Volcker Rule to ensure the U.S. capital markets remain the deepest and most liquid so that all investors receive the greatest return on their investment.”

The Volcker Rule, and the nearly 1,000 pages regulators needed to explain it, prohibits U.S. bank holding companies and their affiliates from engaging in proprietary trading.  But of the 450 financial institutions that failed during or as a result of the 2008 financial crisis, not one failed due to proprietary trading.  In fact, financial institutions that diversified their revenue streams were better able to weather the storm, keep lending and support job growth.

The Financial CHOICE Act, the Republican plan to replace Dodd-Frank and end bank bailouts, would repeal the Volcker rule.

Key Takeaways from the Hearing:

  • From its inception, the Volcker Rule has been a solution in search of a problem – it seeks to address activities that had nothing to do with the financial crisis, and its practical effect has been to undermine financial stability rather than preserve it.
  • The Volcker Rule increases borrowing costs for businesses, lowers investment returns for households, and reduces economic activity overall because it constrains market-making activity.  Unfortunately, the negative impacts of the Volcker Rule do not stop there, as it already has reduced liquidity in key fixed-income markets, including the corporate bond market.
  • Repeal of the Volcker Rule will promote more resilient capital markets and a more stable financial system.

Witness Quotes:

“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.” - Professor Charles K. Whitehead, Cornell University

“Looking at the benefit side of the cost-benefit tradeoff, I believe there is little incremental benefit provided by the Volcker Rule. What about the cost side of this equation? Simply put, the Volcker Rule makes our capital markets less liquid which increases the cost of capital for [customers], especially smaller companies which are the major contributors to job-creation.” - Ronald J. Kruszewski, Chairman and Chief Executive Officer, Stifel Financial Corp.

“The availability of liquidity is a critical element of efficient markets. Many banking entities are key participants in providing this liquidity, promoting the orderly functioning of the markets and committing capital when needed by investors to facilitate trading. Liquidity is particularly important in the everyday operations of mutual funds.” –David Blass, General Counsel, Investment Company Institute

“The Chamber opposed the Volcker Rule at the outset because of the foreseeable negative consequences of the rule, such as restricting market-making and underwriting activities, which in turn impact the ability of businesses to obtain the financing needed for short-term operations and long-term growth…The Volcker Rule has imposed upon financial institutions a complex web of regulatory compliance.” - Thomas Quaadman, Executive Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce

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