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THE GROWTH OF FINANCIAL REGULATION 

AND ITS IMPACT ON 

INTERNATIONAL COMPETITIVENESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MARCH 5, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–69 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

PATRICK T. MCHENRY, North Carolina, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

SEAN P. DUFFY, Wisconsin 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

AL GREEN, Texas, Ranking Member 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

CAROLYN B. MALONEY, New York 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 5, 2014 ................................................................................................... 1 

Appendix: 

March 5, 2014 ................................................................................................... 25 

WITNESSES 

WEDNESDAY, MARCH 5, 2014 

Barr, Michael S., Professor of Law, University of Michigan Law School ........... 10 

Bennetts, Louise C., Associate Director of Financial Regulation Studies, the 

Cato Institute ....................................................................................................... 5 

Hillel-Tuch, Alon, Co-Founder and Chief Financial Officer, RocketHub ............ 6 

Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy Studies, the 

American Enterprise Institute ............................................................................ 8 

APPENDIX 

Prepared statements: 

Barr, Michael S. ................................................................................................ 26 

Bennetts, Louise C. .......................................................................................... 32 

Hillel-Tuch, Alon .............................................................................................. 46 

Wallison, Peter J. ............................................................................................. 60 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

McHenry, Hon. Patrick: 

Written statement of the National Association of Federal Credit Unions 

(NAFCU) ........................................................................................................ 74 

Written statement of the U.S. Chamber of Commerce .................................. 78 

Green, Hon. Al: 

Written statement of Professor Chris Brummer, J.D., Ph.D., Georgetown 

University Law Center ................................................................................. 80 

(1) 

THE GROWTH OF FINANCIAL 

REGULATION AND ITS IMPACT ON 

INTERNATIONAL COMPETITIVENESS 

Wednesday, March 5, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:02 p.m., in room 

2128, Rayburn House Office Building, Hon. Patrick McHenry 

[chairman of the subcommittee] presiding. 

Members present: Representatives McHenry, Fitzpatrick, Barr, 

Rothfus; Green, Cleaver, Sinema, Beatty, and Heck. 

Chairman MCHENRY. This hearing of the Subcommittee on Oversight and Investigations will come to order. Without objection, the 

Chair is authorized to declare a recess of the subcommittee at any 

time. 

I want to welcome our witnesses and members. This hearing is 

entitled, ‘‘The Growth of Financial Regulation and its Impact on 

International Competitiveness.’’ The purpose is to examine the impact of increasing regulations on U.S. financial institutions and 

markets, as well as to evaluate whether differences between domestic and foreign regulations create competitive disadvantages 

and decrease the attractiveness of U.S. financial markets. 

I will now recognize myself for 5 minutes for an opening statement. For a century, American dominance in the financial services 

industry has proven vital to the strength of our national economy. 

Through the Great Depression, the Great Recession, and many ups 

and down in between, American supremacy in this sector has provided access to capital and economic freedoms that other nations 

can only aspire to create. And yet, it should not be taken for granted. We live in an extremely competitive and dynamic global marketplace, and the United States faces a period of rising regulation. 

In the course of implementing the Dodd-Frank Act and Basel III 

rules, U.S. regulators have imposed and continue to impose regulations that will undoubtedly constrain banking and financial services. This hearing will examine both the cumulative impact of these 

regulations and the extent to which differences between domestic 

and foreign regulatory regimes have made it more difficult for U.S. 

financial institutions to compete. In remarks before the International Monetary Conference in June 2011, then-Treasury Secretary Timothy Geithner explained why Congress and financial 

2 

regulators needed to consider the competitiveness of U.S. financial 

markets. 

He said, ‘‘We live in a global financial marketplace with other financial centers competing to attract a greater share of future financial activity and profits.’’ The divergence of regulation across 

borders, however, creates the risk of regulatory arbitrage, in which 

financial institutions and markets direct resources and locate their 

activities to minimize the cost of regulation. As U.S. regulators continue to implement the Dodd-Frank Act, including the Volcker 

Rule, and set capital and liquidity requirements that exceed the 

Basel III recommendations, other countries have been slow to 

adopt similar rules or have refused to adopt them at all. 

Given advances in communications technology, financial institutions are looking outside the United States to avoid the burdens of 

U.S. regulation. As policymakers, we need to be aware of that. Because U.S. financial institutions are in the process of building the 

compliance structures necessary to comply with hundreds of new 

rules, the aggregate cost of all these rules cannot be quantified. Because regulators have refused to undertake cost-benefit analyses 

for these new rules, estimating their cost is difficult. Nonetheless, 

these regulatory burdens will impose costs in the form of anemic 

economic growth and weak job creation. 

In a world in which capital knows no boundaries and competition 

is global, the extent to which new financial regulations impose 

greater burdens on U.S. firms and financial markets relative to Europe, Asia, and other advanced economies will further harm the 

U.S. economy as foreign banks and capital markets grow at our expense. Now, we have to talk about the regulation within our regime 

and what we can control. That is what this hearing is about. Overregulation extends to all areas of finance, even those intended to 

help small entrepreneurs seeking to raise capital through 

crowdfunding. 

Rather than helping these entrepreneurs access a new source of 

capital, the regulations issued by the Securities and Exchange 

Commission require these small businesses to comply with a proposed rule that was so complicated that it required 568 pages for 

the SEC to explain it. This is unacceptable. As the United States 

awaits a final rule from the SEC, European securities-based 

crowdfunding has been permitted to operate under a much more 

reasonable regulatory framework that is continually expanding. 

Other opportunities in Asia are already existent. We are slow to 

catch up when it comes to crowdfunding. 

As it stands today, the United States is a net importer of capital 

and a net exporter of financial services. And yet, the United States’ 

financial services faces a period of rising regulation that could 

threaten this advantage. Financial regulators implementing DoddFrank in international courts have imposed, and continue to impose, regulations to prevent our constrained banking and financial 

services in virtually all of its capacities. As we continue down this 

path it is imperative that we view the regulatory costs and burdens 

in a larger global context. That is how the capital markets view it, 

and as policymakers, that is how we must view it. 

3 

I look forward to hearing from our witnesses today, and the questions our Members have, and I know that we can benefit from the 

broad expertise of this panel. 

With that, I will now recognize the ranking member of the subcommittee, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I also thank the witnesses for appearing this afternoon. 

Mr. Chairman, America has long been a leader within our global 

community. Many look to us and see a land of opportunity, where 

hard work and persistence can mean a better life. Many more view 

our great Nation as an economic superpower whose leadership is 

central to the success of the entire global economy. The question 

of whether America should lead or be led is one that we in Congress confront daily. And I am confident that no Member of Congress believes that America should follow when our leadership is 

needed. 

This is why, when the question of American competitiveness in 

the global economy is raised in the context of regulatory reform, I 

do not oppose a thorough discussion that considers many points of 

view. Such a discussion should include, at minimum, some laconic 

indication as to why a global economic meltdown was imminent, 

how it was avoided, and what was done to avoid a recurrence. 

Why was the global meltdown imminent in 2009? Among many 

reasons advanced were a lack of regulatory structure, such that 

risky products gained global acceptance, significant capital quality 

was poor, risk-based capital ratios of too many huge corporations 

were too low, countercyclical capital was too low, leverage ratios of 

many significantly significant financial institutions were too high, 

liquidity standards were generally inadequate among some major 

financial institutions, and capital standards for many systemically 

significant financial institutions were insignificant or insufficient. 

The conditions led to a circumstance wherein capital was frozen 

to the extent that banks would not lend to each other, and FDIC 

coverage had to be increased from $100,000 to $250,000 to maintain depositor confidence. 

How was the global meltdown avoided? When the markets nearly 

collapsed, costing an estimated $13 trillion in economic output, 

countries were devastated as the housing bubble burst. The U.S. 

Government took unprecedented steps to avoid a global economic 

depression by supporting American financial institutions critical to 

the global markets, extending over $1 trillion in support, including 

an estimated $580 billion in liquidity swap blinds for foreign countries, all of which is to be repaid. 

Now, what was done to avoid a recurrence? The codification and 

passage of Dodd-Frank—this legislation deals with too-big-to-fail 

taxpayer bailouts—indicates America’s leadership, and this is a 

great piece of legislation that was passed. Many other countries 

have followed suit and have begun considering their own similar 

regulatory efforts. 

Mr. Chairman, I believe—I have always contended and believed 

that we should amend Dodd-Frank, not end it. Legislation of this 

magnitude is rarely perfect, and I believe that we must do all that 

we can to avoid unintended consequences. However, I also believe 

that Dodd-Frank was, and is, necessary. Important evidence of the 

4 

necessity for Dodd-Frank is the fact that Congress passed DoddFrank in this time of a divided Congress. As I mentioned earlier, 

any analysis of American economic competitiveness merits a thorough discussion. It is important for the record to reflect that much 

of Dodd-Frank’s rulemaking has not been finalized. Further, it is 

also important to note that many times, our Federal regulators 

have amended the rules when the public and Congress has raised 

concerns. 

The Basel III framework was originally agreed upon in 2010. 

However, the provisions of the agreement are still being implemented, and some are scheduled to come online as late as 2019. In 

addition, other important regulatory rulemakings have not been finalized at this time, and we should consider their impacts as I am 

concerned it may be premature, at this time, to draw final conclusions on rules that are far from final without evidence of an adverse impact. 

The SEC is woefully underfunded, to the extent that mission-critical capacity may be compromised. This is why, in part, I support 

the President’s requested amount, and believe that in so doing, in 

funding the SEC, we might engender greater progress and stronger 

enforcement, which means better investor protection. When we 

comport with the belief that regulatory reform places America at 

a competitive global disadvantage, we expose ourselves to the risk 

of a great irony: there will always be the fear of failing, or falling 

behind the innovation curve. That is what has led to the new regulations and has caused us to turn a blind eye to securities markets 

that caused a great downturn and that we still do not fully understand. 

America must lead. We did this with Dodd-Frank, and we must 

expect the same from our global counterparts as they work to 

strengthen their regulatory frameworks. 

I look forward to hearing from our witnesses, and I thank you, 

Mr. Chairman. I yield back the balance of my time. 

Chairman MCHENRY. We will now recognize our distinguished 

witnesses. I will introduce the panel, and then we will begin and 

go in order here. 

First, Louise Bennetts is the associate director of financial regulation studies at the Cato Institute. She focuses on the impact of 

financial regulatory reform since 2008, including attempts to address too-big-to-fail and the impact of cross-border regulatory initiatives on financial stability and global capital flows. 

Second, we have Alon Hillel-Tuch, the co-founder and CFO of 

RocketHub, which is a rapidly expanding online crowdfunding portal. He was previously a special situations manager at BCMS Corporate. 

Third, Peter J. Wallison is co-director of the American Enterprise 

Institute’s program on financial policy studies. Previously, as General Counsel to the U.S. Treasury Department, he had a significant 

role in the development of the Reagan Administration’s regulatory 

reforms in the financial services marketplace. 

And finally, Michael Barr is a law professor at the University of 

Michigan Law School. He was previously on leave in 2009 and 

2010, serving as the Treasury Department’s Assistant Secretary for 

5 

Financial Institutions. He was very involved in the development of 

the Dodd-Frank Act during that time, as well. 

Now, for those of you who are well-acquainted with this, you understand the lighting situation we have here in Congress. As Members of Congress, we need very simple rules of the road. And so 

green means go, yellow means hurry up, and red means stop. 

Without objection, the witnesses’ written statements will be 

made a part of the record. And the idea here is for you to summarize your written statement in 5 minutes. 

We will begin with Ms. Bennetts. 

STATEMENT OF LOUISE C. BENNETTS, ASSOCIATE DIRECTOR 

OF FINANCIAL REGULATION STUDIES, THE CATO INSTITUTE 

Ms. BENNETTS. Chairman McHenry, Ranking Member Green, 

and distinguished members of the subcommittee, I thank you for 

the opportunity to testify in today’s important hearing. As Chairman McHenry noted, I am Louise Bennetts, the associate director 

of financial regulatory studies at the Cato Institute, which is a nonprofit, nonpartisan public policy institute here in Washington, D.C. 

Before I begin, I would like to highlight that all comments I 

make and opinions I express are my own and do not represent any 

official positions of the Cato Institute or any other organization. 

In the United States, since 2010, we have seen the rollout of one 

of the most comprehensive reform agendas targeting the financial 

services industry. The centerpiece of the reform agenda, the DoddFrank Wall Street Reform and Consumer Protection Act, has 394 

associated rulemaking requirements, and has already spurred 

thousands of pages of related rules. 

But this is just the tip of the iceberg. As of February 2014, only 

52 percent of the rules required by the Act have been finalized. 

Around 20 percent have yet to be proposed. And Dodd-Frank is but 

one component of a much, much larger financial regulatory reform 

agenda which includes a complete overhaul of capital and liquidity 

rules imposed on the U.S. banking sector; a radical revision of the 

regulation of non-bank financial companies, such as insurance 

firms and asset managers; changes in the regulation of U.S. operations of foreign banks; changes in the regulation of consumer credit; and the imposition of new monitoring and enforcement obligations on behalf of the Federal Government. 

And all of these obligations are multiplied for banks that operate 

cross-border. In addition, barely a month passes without a new financial initiative being proposed either in Congress or through the 

regulatory agencies. While many of these proposals will never see 

the light of day, they nonetheless impose a significant cost on the 

private sector in terms of the uncertainty they generate. The question before the committee today is, how is this regulatory overhaul 

impacting the global competitiveness of the American financial 

services sector and, indeed, American consumers of financial services? 

To date, no assessment has been made of the cumulative impact 

or cost of all of this regulation. To answer it, in my view, we need 

to address two related issues. The first is, what are the individual 

and cumulative costs? And second, and more importantly, are we 

likely to achieve the desired outcome, that is, creating a financial 

6 

system that is safer and more transparent, without damaging credit provisions. 

First, I would like to make a few observations about the United 

States’ position in the global economy. As Chairman McHenry 

noted, the United States is a net importer of capital and a net exporter of financial services. And despite its fragmented regulatory 

system and its crisis-prone banking history, the United States has 

nonetheless developed the world’s most vibrant capital markets 

and currently has the only well-developed debt market and shortterm or overnight dollar funding market. Most foreign companies 

and banks raise a significant portion of their non-depository funding here in the United States. Because of this, the United States 

today has the world’s reserve currency and is able to finance its 

significant deficits, where other countries have struggled to do so. 

However, while the United States may have had a head start, 

one cannot assume a permanent state of dominance. Steps are 

being taken to develop high-yield and other short-term funding 

markets, particularly in Southeast Asia, as well as in Europe, although I note that the European funding markets remain weak. In 

addition to the large European banks, several emerging markets, 

most notably China, are taking noteworthy steps towards the creation of worldwide banking conglomerates. Both defendants and 

opponents of the current regulatory reform agenda frequently 

present this issue as a binary choice between profitability and competitiveness one hand, and safety and stability on the other. 

For the reasons we will discuss today, and as set out in my written testimony, I view this as a false dichotomy. The time has come 

to acknowledge that we are at a crossroads globally and domestically. One path leads to a system where American banks and financial services firms, buckling under the weight of excessive regulation, become less diversified, less competitive globally, more inward-looking and, in my view, potentially more unstable. This path 

leads to a suboptimal outcome, where firms are focused on pleasing 

regulators rather than on market risk and meeting the needs of 

their consumers. 

Another path begins with the recognition that we really may 

have gone a step too far. The time has come to ask ourselves what 

was the purpose of all of this? If the purpose is to make the United 

States banking sector less crisis-prone, safer, and more competitive, 

we need a comprehensive and realistic assessment of whether all 

these regulations, given their costs, are achieving this outcome. 

I thank you for the opportunity to testify today. 

[The prepared statement of Ms. Bennetts can be found on page 

32 of the appendix.] 

Chairman MCHENRY. Thank you, Ms. Bennetts. 

Mr. Hillel-Tuch? 

STATEMENT OF ALON HILLEL-TUCH, CO-FOUNDER AND CHIEF 

FINANCIAL OFFICER, ROCKETHUB 

Mr. HILLEL-TUCH. Mr. Chairman and members of the subcommittee, thank you for this opportunity to provide testimony. My 

name is Alon Hillel-Tuch. I am a co-founder and chief financial officer of RocketHub. RocketHub is an established crowdfunding platform that has initiated over 40,000 campaigns and has provided acVerDate Nov 24 2008 12:32 Aug 26, 2014 Jkt 088531 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\88531.TXT TERRI
7 

cess to millions of dollars worth of capital for entrepreneurs and 

small businesses in over 180 different countries. 

My testimony today is based on my field experience working 

closely with new and small business. Domestic job growth comes 

from the new and small business sector. Approximately 90 percent 

of U.S. firms employ 19 or fewer workers, and these companies create jobs at nearly twice the rate of larger companies. According to 

January’s ADP national employment report, between December 

and January small businesses with fewer than 50 employees added 

75,000 positions. That is more than double the number of jobs large 

businesses created in the same period. 

Job creation is the most prevalent in new companies. And if our 

job goal is to drive job growth within the United States, our focus 

should be on new business formation. The spirit of entrepreneurship in the United States is unparalleled and, as a result, more 

Fortune 500 companies exist in the United States than anywhere 

else in the world. Those large companies are serviced well by big 

banks and the public markets. But new and small businesses often 

find it difficult to access capital. 

In the United States, investment capital is mainly limited to regions such as New York City, Boston, and Silicon Valley. However, 

most new and small businesses do not have access to these capital 

zones, let alone the innovation hubs recently created by the White 

House. Crowdfunding platforms such as RocketHub provide capital 

access to new and small businesses that are either neglected by 

large banks or face unmanageable interest rates due to different 

risk mechanisms. 

Until recently, the crowdfunding market was allowed to evolve 

and innovate without government oversight. Platforms sprouted, 

and the public quickly adopted this social form of capital formation. 

Equity crowdfunding was the next evolutionary step in the market, 

and the first time Congress became involved. The House of Representatives passed several bills focused on economic revitalization 

and democratizing access to capital. This became the Jobs Act that 

the President signed into law on April 5, 2012. 

But since then, implementation delays have been significant. It 

took the FCC 566 days to release proposed rules for Title III. In 

the meantime, basic forms of equity crowdfunding have been operational for almost 3 years in the United Kingdom and the Netherlands, and for nearly 5 years in Australia. The United States is a 

market that is a magnet for domestic and foreign entrepreneurs. 

But they must have the necessary tools available within the United 

States to innovate and grow. 

And other countries are actively pursuing these entrepreneurs. 

For example, Chile has a special visa program for foreign entrepreneurs that includes a $40,000 grant. And they proactively approached RocketHub. They sat down with me to discuss leveraging 

crowdfunding, including equity-based crowdfunding, within the 

Chilean market. I have had similar discussions with foreign direct 

investment agencies in France, as well as the Ontario securities 

commission in Canada. The World Economic Forum’s global competitive report identifies the United States as an innovation powerhouse, yet we rank only 5th in competitiveness. 

8 

Certain countries that ranked lower in competitiveness, such as 

the Netherlands (8th) and the United Kingdom (10th) are catching 

up. And they are doing this by being forward-thinking market 

innovators, encouraging new capital formation policies such as equity-based crowdfunding, well in advance of the United States. 

This is not a brand-new market. It is a market that has been in 

existence for awhile. And it has its wings clipped in the United 

States by overregulation. This is an important economic tool that 

helps small and young businesses grow, which will drive job creation. 

And if it is not allowed to continue to develop in the United 

States, the market will ultimately continue to develop outside this 

country. The Jobs Act, and Title III in particular, was intended to 

mandate low-cost regulation that relied on individuals within the 

marketplace and their socially-informed investment appetite. However, it has evolved into a high-cost solution relying heavily on 

frameworks developed over 80 years ago. 

At this point, legislative support is needed to assist the Securities and Exchange Commission in creating functional rules for Title 

III. Checks and balances within emerging markets are critical not 

only for consumer protection purposes, but also to generate trustworthiness in the market. I believe appropriate regulation, 

leveraging a soft yet informed approach, is crucial. With congressional support, we can increase the economic benefit provided by 

crowdfunding and remain competitive in the international market. 

The current market dynamics abroad, demonstrated by countries 

such as Canada, the United Kingdom, the Netherlands, Australia, 

Italy, and now New Zealand make it clear that only a proactive approach in ensuring functional regulation will enable the United 

States to maintain a dominant international position for new and 

small businesses. I hope to have the opportunity to elaborate further on key provisions. 

And I thank you for your time. 

[The prepared statement of Mr. Hillel-Tuch can be found on page 

46 of the appendix.] 

Chairman MCHENRY. Thank you. 

Mr. Wallison? 

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

Mr. WALLISON. Chairman McHenry, Ranking Member Green, 

and members of the subcommittee, my testimony today will focus 

on a different aspect of financial regulation and competition: the 

competition between banks and non-bank financial firms, what 

bank regulators call ‘‘shadow banking.’’ This needs much more attention from Congress. Under the Dodd-Frank Act, the Financial 

Stability Oversight Council (FSOC) has the authority to designate 

any financial firm as a systemically important financial institution 

(SIFI) if the institutions’s financial distress will cause instability in 

the U.S. financial system. 

Non-bank financial firms designated as SIFIs are then turned 

over to the Federal Reserve for what appears to be prudential 

bank-like regulation. The troubling extent of the FSOC’s authority 

9 

was revealed recently, when it designated the large insurer, Prudential Financial, as a SIFI. Every member of the FSOC that was 

an expert in insurance and was not an employee of the Treasury 

Department dissented from the decision, arguing that the FSOC 

had not shown that Prudential’s financial distress would cause instability in the financial system. 

Virtually all other members, knowing nothing about insurance or 

insurance regulation, dutifully voted in favor of Prudential’s designation. Indeed, there was little data in the document that the 

FSOC issued in support of its decision. The best way to describe 

the decision is perfunctory. There is a reason for this. In effect, the 

decision on Prudential had already been made before the FSOC 

voted. The previous July, the Financial Stability Board (FSB), an 

international body of regulators, empowered by the G20 leaders to 

reform the international financial system, had already declared 

that Prudential was a SIFI. 

The FSOC’s action was simply the implementation in the United 

States of a decision already made by the FSB. Since the Treasury 

and the Fed are members of the FSB, they had already approved 

its July action. This raises a question of whether the FSOC will be 

doing a thorough analysis of whether financials firms are SIFIs, or 

simply implementing decisions of the FSB. This is important because the FSB looks to be a very aggressive source of new regulation for non-bank financial firms. 

In early September, it said that it was looking to apply the ‘‘SIFI 

framework,’’ as it called it, to securities firms, finance companies, 

asset managers, and investment funds, including hedge funds. 

These firms are the so-called ‘‘shadow banks’’ that regulators want 

so badly to regulate. But it will be very difficult to show that these 

non-bank firms pose any threat to the financial system. For example, designating large investment funds as SIFIs would be a major 

and unwarranted extension of bank-like regulation. Collective investment funds are completely different from the banks that suffered losses in the financial crisis. 

When a bank suffers a decline in the value of its assets, as occurred when the mortgage-backed securities were losing value in 

2007 and 2008, it still has to repay the full amount of the debt it 

incurred to acquire those assets. Its inability to do so can lead to 

bankruptcy. But if an investment fund suffers the same losses, 

these pass through immediately to the fund’s investors. The fund 

does not fail, and thus cannot adversely affect other firms. Asset 

management, therefore, cannot create systemic risk. 

Nevertheless, right after its Prudential decision, and following 

the FSB’s lead, the FSOC now seems to be building a case that 

asset managers of all kinds should also be designated as SIFIs and 

regulated by the Fed. It recently requested a report from the Office 

of Financial Research, another Treasury body created by DoddFrank, on whether asset management might raise systemic risk. 

Not surprisingly, OFR reported that it did. Unless the power of the 

FSOC is curbed by Congress, and soon, we may see many of the 

largest non-bank firms in the U.S. financial system brought under 

the control of the FSOC, and ultimately the Fed, and regulated like 

banks. 

10 

As shown in my prepared testimony, these capital markets firms, 

and not the banks, are now the main funding sources for U.S. business. Bringing them under bank-like regulation will have a disastrous effect on economic growth and jobs. And this outcome could 

be the result of decisions by the FSB, carried out by the FSOC. 

This is an issue Congress should not ignore. 

I look forward to your questions. Thank you. 

[The prepared statement of Mr. Wallison can be found on page 

60 of the appendix.] 

Chairman MCHENRY. Thank you, Mr. Wallison. 

And last, we will hear from Professor Barr. 

STATEMENT OF MICHAEL S. BARR, PROFESSOR OF LAW, 

UNIVERSITY OF MICHIGAN LAW SCHOOL 

Mr. BARR. Chairman McHenry, Ranking Member Green, and 

members of the subcommittee, I am pleased to appear before you 

today to discuss financial regulation and U.S. competitiveness. In 

2008, the United States plunged into a severe financial crisis, one 

that shuttered American businesses and cost millions of households 

their jobs, their homes, and their livelihoods. The crisis was rooted 

in unconstrained excesses and prolonged complacency in major financial capitals around the globe. 

In the United States, 2 years later, the Dodd-Frank Act created 

the authority: to regulate these major firms that pose a threat to 

financial stability without regard to their corporate form, and to 

bring shadow banking into the daylight; to wind down major firms 

in the event of a crisis without feeding a panic or putting taxpayers 

on the hook; to attack regulatory arbitrage, restrict risky activities, 

regulate short-term funding, and beef up banking supervision; to 

require central clearing and exchange trading of standardized derivatives, and capital, margin and transparency throughout the 

market; to improve investor protections; and to establish a new 

Consumer Financial Protection Bureau (CFPB) to look out for 

American households. 

Since enactment, the CFPB has been built and is helping to 

make the marketplace level and fair. New rules governing derivatives transactions have largely been proposed. Resolution authority 

and improvements to supervision are being put in place. The Financial Stability Oversight Council has begun to regulate the shadow banking system by designating non-bank firms for heightened 

supervision. And regulators have recently finalized the Volcker 

Rule. 

To continue to make progress on reform, the Federal Reserve 

needs to finalize its limits on counterparty credit exposures and 

propose a cap on the relative size of liabilities held by the largest 

firms. It must also continue the reform of REPO and other shortterm funding at the heart of the financial panic. Five years after 

the money market mutual fund industry faced a devastating run, 

stopped only with a $3 trillion taxpayer bailout, we still do not 

have fundamental reform of that sector, with the necessary buffers 

to prevent a financial collapse. 

And we need legislation to determine the ultimate fate of the 

government-sponsored enterprises in a way that protects taxpayers, while assuring that the mortgage system works for AmerVerDate Nov 24 2008 12:32 Aug 26, 2014 Jkt 088531 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\88531.TXT TERRI
11 

ican families. Strong and effective regulation in the United States 

is crucial to a safer and fairer financial system, but it is not 

enough. We also need global reforms. Strong capital rules are one 

key to a safer system. There is already double the amount of capital in the major U.S. firms than there was in the lead-up to the 

financial crisis. 

At the same time, globally, regulators are developing more stringent risk-based standards and leverage caps for all financial institutions, and tougher rules for the biggest players. More needs to 

be done to make resolution of an international firm a practical reality. In the United States and Europe, further work is needed on 

implementing structural reforms that could reduce risks, improve 

oversight, and make the largest firms more readily resolvable in 

the event of a crisis. 

On derivatives, while much progress has been made, the United 

States remains concerned about whether Europe’s rules will end up 

strong enough. And many in Europe worry about whether the 

United States will extend the reach of its rules too far. Yet, the 

global system is moving to a more coordinated approach for derivatives that is making a meaningful difference. The United States 

has taken a strong lead in all of these efforts, galvanizing the G20 

and pursuing global reforms. Now is not the time to weaken this 

global effort. 

In sum, strong U.S. financial rules are good for the U.S. economy, good for American households, and good for American businesses. We cannot afford to roll back the clock on financial reform 

in the name of U.S. competitiveness. Engaging in a race to the bottom is a bad idea for both the United States and for the global financial system. We should address the current potential for international regulatory arbitrage by pushing for more global reforms, 

not by weakening our own standards or exposing our own country 

to the risks of another financial crisis. 

The fact that the United States acted forcefully in implementing 

reforms is good for the United States, ensuring that our financial 

system is more stable and able to weather our future financial crises. In contrast, Europe still faces serious sources of risk in their 

financial systems. In Europe, its piecemeal approach to reform has 

led to considerable uncertainty that has hurt investment and delayed economic recovery. Rather than focusing on how we can lower 

our own standards, we need to focus on continuing to push for global reforms so that the risks that could develop overseas do not 

come back to our own shores in a future financial crisis. 

Thank you very much. 

[The prepared statement of Professor Barr can be found on page 

26 of the appendix.] 

Chairman MCHENRY. I will now recognize myself for 5 minutes 

for my questions. The success of our capital markets in the United 

States has to do a lot with property rights and contract law and 

certainty of our regime, as well as wise regulation, not the absence 

of regulation, which is a misunderstanding and a wrong conclusion 

of the last financial crisis. There was regulation prior to 2008. It 

did exist. Perhaps it was bad regulation that led to some bad outcomes. 

12 

But just to put that as a marker down to this first question I 

have, which is if you look at the world and the flow of capital 

around the world, Ms. Bennetts, is there a rapid increase in financial regulation? And is that rapid increase of regulation having an 

effect on the flow of capital in the world? Is that a proper understanding, that regulation and capital have some linkage? 

Ms. BENNETTS. Yes, and certainly—I think that the most recent 

sort of noteworthy study on that was undertaken by the McKinsey 

Global Institute. They brought it out, I think, in about March of 

last year. And what they have said is that since the crisis, since 

about 2007, I think, global capital flows have declined about 60 

percent. Some of that has to do with the crisis in Europe, which 

I think is an issue of government data and placing the banking sector in an extraordinarily difficult position. And that is a separate 

issue. 

But a lot of it also has to do with the fact that following a crisis, 

the natural tendency of regulatory authorities, wherever they may 

be, is to look inward and to put barriers, and it is sort of a process, 

which I think is frequently referred to as ‘‘balkanization.’’ And that 

makes the local sector far more insular and far more inward-looking. That is a problem because it has a real cost for the flow of capital. 

And one other thing I would say about that is, you often hear or 

you read in pieces that people say it almost sounds like these flows 

are a bad thing, that it is a bad idea to have capital flowing across 

borders. But in fact, the crisis would have been far, far worse in 

2008 if we didn’t have the free flow of movement across borders. 

So that was actually, for the United States, a very big and important— 

Chairman MCHENRY. But there is a—everyone is talking about 

Europe here when they testify—financial regulators in the United 

States are testifying about European movements and perhaps following in a similar direction, as we have in our regime. But isn’t 

it, in fact, the case that with three of the world’s largest banks 

being Chinese, there is a movement in Asia to go a different direction in terms of regulation? 

Ms. BENNETTS. First of all, Europe is an interesting case. Because, for example, if you take a recent initiative—and I will use 

one that is in both countries—the Volcker Rule, right? The Volcker 

Rule came out in the United States and it is, as we know, a mammoth undertaking. It is a very complex rule that spans hundreds 

of pages. There is a lot of micromanaging within the rule, a lot of 

ongoing enforcement and monitoring. 

And when you look at the way that the Europeans have approached it, they have released a similar rule recently. But theirs 

is more sort of a principal-based approach. They come out and say, 

‘‘We would prefer that you didn’t do this proprietary trading that 

has no client benefit, but we are not really going to institute ongoing and expensive monitoring and enforcement type requirements.’’ 

So I would argue that is a lot less burdensome for the institutions 

which are following it. 

That has been a consistent approach that they have adopted. 

They certainly have a very different approach in Asia, certainly in 

Hong Kong and Singapore, which is where the main markets are, 

13 

you don’t see the same level of regulation. They want high capital, 

but they don’t have the same level of micromanagement. 

Chairman MCHENRY. Mr. Hillel-Tuch, about crowdfunding, I authored that section of the Jobs Act that has a regime so that we 

can have low-dollar equity raising online. You have done a study 

on what those 568 pages have—the cost structure on a 

crowdfunding raise. Do the regulations have a bearing on the costs 

of raising money through crowdfunding? 

Mr. HILLEL-TUCH. Yes. It took a long time to read through all 

those pages. It was quite cumbersome to do, and unfortunately I 

have had to do it a few times due to inconsistencies. But we did 

an analysis which I included as a chart in my written testimony 

that you are free to take a look at. But there are friction points created within the regulation that basically allow for up to 50 percent 

of the money raised going towards overhead and compliance costs. 

So what happens is, you have an act that, instead of becoming a 

reform act or an innovation act becomes a regulatory act with regulatory friction points. 

Some of them have to be changed, and that is only something 

that could be done with congressional support. Some of them can 

be changed at the discretion of the SEC, with proper support given 

by not just Congress but other people, as well. It is quite significant when you are a small business owner and you are facing upfront costs that can easily go over $30,000 without any kind of a 

guarantee that you are going to receive the capital you raised. And 

that is a significant debt people should not bear. 

Chairman MCHENRY. My time has expired. 

We will now recognize Mr. Cleaver for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. When I played football, 

we lived for the moment of getting a running back or a wide receiver out in the middle of the field, putting your helmet into him, 

and hearing the crowd go, ‘‘Ooh.’’ That was delicious. It has been 

outlawed; you can’t do it anymore. You can’t even trip anyone anymore. Tripping used to be one of the best things going, but you 

can’t trip, they won’t let you trip anymore. 

And you can’t even—you have to pamper the quarterback. You 

have to go in and say, ‘‘Sir, is it okay if I hit you?’’ There are all 

of these new regulations imposed on these football teams. And 

every winter, there is a committee of owners who meet to consider 

new regulations. I traveled with the Kansas City Chiefs playing in 

Tokyo, actually twice. They played in Mexico, and then London. 

Sellouts. And there is a great market for all of the memorabilia 

that you buy for the Chiefs and the Giants and the Cowboys all 

over the world. 

In Canadian football, which is similar to American football, they 

constantly look at what we are doing in the United States to make 

decisions on what they are going to do in Canada. We don’t alter 

the American rules to accommodate what the Europeans or the Africans or Asians are doing in what they call football, which we call 

soccer. Football is still the number one sport in the world economically, just like the United States is. And there is simply no reason 

for the NFL to abandon rulemaking and regulations, because they 

are making the game safer. 

14 

And I am wondering what is wrong with trying to make the 

game safer, as we are talking about the economics of the United 

States. I was here with Mr. McHenry and Mr. Green—I guess we 

may now be the only three who were here on the day that we had 

the economic collapse. I don’t ever want that to happen again. And 

to the degree that we can make rules and regulations that will prevent it, how many of you don’t—who believes that is wrong? Anybody else? 

Mr. BARR. I think you are right, Mr. Cleaver. I think that we 

need to have strong rules of the game that make the system safer 

and fairer for American families and businesses, and that make us 

have a strong and vibrant financial system. And I think we are on 

the right path to do that. 

Mr. CLEAVER. Mr. Wallison? 

Mr. WALLISON. I would like to point out that there are, as the 

chairman suggested, bad regulations. And one of them is the Basel 

regulations, I, II, and III. 

Mr. CLEAVER. Basel II? 

Mr. WALLISON. Beginning with the different risk weights that 

were put on assets, and as a result, the capital cost was much 

cheaper for banks to buy mortgage-backed securities. They did this 

in vast numbers because they were only required to hold 1.6 percent capital for mortgage-backed securities but 8 percent capital for 

perfectly good corporate securities. The result of this, of course, was 

when mortgage-backed securities collapsed in 2007 and 2008, 

banks were hurt very badly. 

In fact, that was the immediate cause of the financial crisis. So 

I think we have to be very careful about the kinds of regulations 

that we put in place. Some of them can be extraordinarily harmful, 

and that is one. 

Mr. CLEAVER. Yes, I would agree. But what you do is that you 

revisit any of the rules that became an impediment to the game, 

which is not what we are doing. You want to make the rules better. 

The problem is that instead of making the rules better, we attack 

the rules. 

My time has run out, and I didn’t even get to basketball. 

Chairman MCHENRY. I didn’t follow you at all. I don’t follow football or soccer much, but I do follow NASCAR. So if you had done 

that, I would have maybe tracked a little bit—no. I appreciate my 

colleague. 

I now recognize the vice chairman of the subcommittee, Mr. 

Fitzpatrick, for 5 minutes. 

Mr. FITZPATRICK. I appreciated Mr. Wallison’s comment that the 

rules, or in this case the regulations, have to be thoughtful. They 

have to be fair, they have to be evenly applied, and not just simply 

cumulative or reactionary. I am mainly concerned about the risk of 

retaliation against the United States by foreign regulators, number 

one. Number two, is there a possibility that foreign banks will seek 

to do business with United States firms from abroad? 

And finally, the impact of all of this on jobs here in the United 

States, which as we consider rules and regulations and new laws 

and cumulative laws, we also have to consider and weigh carefully 

the impact of all of this on how it affects people here in this country, people at home in our districts, those jobs. And I was wonVerDate Nov 24 2008 12:32 Aug 26, 2014 Jkt 088531 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\88531.TXT TERRI
15 

dering, Ms. Bennetts, would you be able to comment on the question of whether or not—the first question, is there a risk of retaliation against the United States by foreign regulators? 

Ms. BENNETTS. Yes, I think—and Representative Green sort of 

mentioned, I think, in his opening statements about being a leader. 

The United States is a leader in the global financial services sector. 

So what the United States does is important in the global economy. 

And one of the problems, for example, a piece of research I have 

recently done is on the Federal Reserve’s Foreign Bank Proposal, 

and the potential impacts of that down the road. 

When you undermine your ability to work with foreign regulators, and you say, ‘‘We are going to take an approach where we 

are essentially going to ring-fence your operations in our country,’’ 

that really opens up the door for those foreign regulators to say, 

‘‘If you are doing that in your country, we don’t believe firms can 

be resolved on a global level. So we are going to do the same to 

your firms in our country.’’ And that creates a lot of problems, particularly for U.S. institutions that operate cross-border. And also 

for institutions or companies, American companies, that use these 

financial services and need the ability to move money and services 

across borders. 

And then further down the road, I think, as I said, the United 

States is in a lucky position today. Because they are able to—sort 

of in a unique position because they have these debt markets that 

aren’t developed elsewhere in the world. But that is now. And we 

have seen them move towards developing them elsewhere. And so 

all that will happen is foreign banks that do all that business here 

will move it elsewhere. And that is a few years down the road, but 

it is definitely coming. 

Mr. FITZPATRICK. How about the potential for retaliation by foreign regulators? 

Ms. BENNETTS. Michel Barnier said, when the first proposal of 

the Fed’s rule—this is just the most recent example that came 

out—one of the letters that came into the Federal Reserve comment ledgers was from foreign regulators. And they said, ‘‘We are 

under pressure. If you do this, we are under pressure to do the 

same thing in our own markets.’’ And so, that is a big problem. 

And we will see what happens. It is early days, but I think they 

are likely to retaliate. 

Mr. FITZPATRICK. Mr. Hillel-Tuch, you do business with a lot of 

foreign firms, I assume, from the United States. So what is the risk 

that foreign banks are going to say, we will do business with the 

United States, but from over here? 

Mr. HILLEL-TUCH. Yes. What is starting to get interesting specifically about some of the points that the other witnesses made is, 

you are looking at banks that are sort of becoming incentivized to 

trade with other foreign banks instead of entering the United 

States at all. And you are going to start getting collaboration between different banks who may not even want to work with companies such as mine because we are mainly affiliated with the U.S. 

banking system. 

We are seeing that more and more often. Operating in over 180 

different countries, we are on the foreign exchange all the time for 

different currencies, having to move that around globally in real 

16 

time. That is becoming increasingly harder to do as people are uncertain about what is happening next. What that means for me is, 

I am starting to have to become more selective on what countries 

I am operating in as a U.S.-born firm, and I have to start considering registering in other countries as an entity purely because I 

am being kind of hindered in my ability to operate out of the 

United States. 

Mr. FITZPATRICK. Mr. Wallison, can you address the impact on 

jobs here in the United States of what was just discussed? 

Mr. WALLISON. Certainly. I happen to believe that one of the reasons that we have had such a slow recovery from the financial crisis and from the recession that followed is that the regulations that 

we have placed on the financial system have really brought it to 

its knees, to use the expression that is used in other contexts. People in the financial world are now quite afraid of interference by 

the government, charges of various kinds by the government, and 

are unable to understand the very complex regulations that they 

have to face. 

In particular, I think the Basel regulations have become enormously complex. It is almost impossible to understand them. So, we 

need a much simpler set of regulations, such as a simple leverage 

ratio for banks instead of this very complex set of regulations. They 

have just gotten worse since Basel I was adopted in the 1980s. 

Mr. FITZPATRICK. I appreciate the comments. 

Thank you. 

Chairman MCHENRY. We will now recognize Mrs. Beatty for 5 

minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman, and Mr. Ranking Member. And thank you to the witnesses for being here today. I am trying to wrap my head around this whole crowdfunding issue. So let 

me kind of go back, and maybe Mr. Barr or anyone who wants to 

address it. You will certainly recall that in April 2012, President 

Obama signed into law the Jumpstart Our Business Startups Act, 

or the Jobs Act, which was designed to spur hiring through relaxed 

regulations regarding public and private companies’ ability to raise 

capital. 

And the Jobs Act was widely supported and received almost 400 

votes from both Democrats and Republicans, who felt that it was 

the right way to improve the economic climate in the United 

States. However, since its passage, the SEC has come under scrutiny for having something moving too slowly and creating new 

rules, or for creating rules that were still too restrictive. In particular, some have expressed concerns that the proposed Title III 

crowdfunding rules will unduly restrict access to private capital, especially when compared with the regulations in place in the U.K. 

So with that said, two questions: First, can you speak generally 

about what types of considerations must be addressed when creating rules for the new crowdfunding platforms and mandatory disclosures? 

Mr. BARR. I would be happy to say a few words about it. I think 

the question is how to get the balance right. And my understanding 

is, the SEC received lots of comments about their initial proposal 

from lots of different kinds of parties: small businesses; sites and 

brokers that were interested in participating; and from investors 

17 

and investor protection advocates. And no one was especially 

happy. So the SEC is going to have to, I think, go back and look 

at the rule and see if they can come up with a simpler approach 

that protects investors and also permits efficient raising of funds. 

My understanding is that the U.K. and the E.U. are in the midst 

of reevaluating their current framework, as well, and they may 

make adjustments in either direction on where they are. So I think 

that it is an evolving area; it is a relatively new area. And I think 

getting the balance right is going to be really critical. 

Mrs. BEATTY. Let me just follow up, because you also used the 

word ‘‘protection.’’ Some of the commentators are suggesting that 

the businesses that are most likely to seek to raise capital through 

crowdfunding are the ones with the greatest risk of failure. Or they 

don’t have a sufficient track record to satisfy the concerns of venture capitalists. How would you categorize the level of risk faced 

by the investors who use crowdfunding? 

Mr. BARR. There are significant risks involved in investing in 

new companies. That doesn’t mean it shouldn’t be done, but new 

companies can be quite risky to invest in, and I think that is why 

it is important, while you are expanding access to these sources of 

funds, to make sure that the information and disclosure and protections are there so that investors understand the risks that they 

are taking on and engaging in the funding. 

Mrs. BEATTY. Have you or any of the panelists had any instances 

of failure by businesses that raised capital through crowdfunding? 

Mr. HILLEL-TUCH. We have had well over 40,000 campaigns at 

this point. We have had no successful instances of fraud. We have 

had no significant failures. More revampings. A small business 

might have had to change the direction it was looking to take, 

which is expected at an early stage of a company. We have seen 

everything from idea stage all the way to product concepts. What 

is really interesting is that right now, there are no upfront costs 

they have to face in trying out what is currently available, which 

is perk-based crowdfunding. 

What is happening with the Jobs Act, though, because of the equity component we have to put in new regulation, which is critical. 

But there are a lot of requirements, in order to ensure information 

is correct. It puts the cost burden directly on the small business. 

So if you are a small business—let’s say a coffee shop in Kentucky—you really cannot afford, out of pocket, $30,000 up front in 

order to then say, ‘‘I am able to raise over $500,000 because I was 

able to afford an audit,’’ while maybe you don’t even have historical 

financial information to truly audit. 

There are a lot of nonsensical components. The intent was great, 

but the execution of it does not actually make sense at the small 

business level. 

Mrs. BEATTY. Thank you. 

Thank you, Mr. Chairman. 

Chairman MCHENRY. We will now recognize Mr. Barr of Kentucky for 5 minutes. 

Mr. BARR OF KENTUCKY. Thank you, Mr. Chairman. I want to 

kind of focus on the issue of contradictory regulatory mandates. 

Has this phenomenon proliferated as a result of Dodd-Frank? And 

can you all provide a couple of examples of where this kind of avaVerDate Nov 24 2008 12:32 Aug 26, 2014 Jkt 088531 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\88531.TXT TERRI
18 

lanche of regulations has contributed to regulatory confusion and 

contradictory regulatory requirements imposed on financial institutions? 

Ms. BENNETTS. Yes, I definitely think that—so, for example, 

where you have an issue like the Volcker Rule and you have several regulatory agencies. This is a big problem in the Dodd-Frank 

Act. And we see the United States has a very fragmented regulatory system, as well, which allows for a lot of the regulatory arbitrage that we talk about. But Dodd-Frank made that problem a lot 

worse because you have many, many agencies that had mandates 

over the same rules. 

And just for example, it is not exactly an overlapping mandate, 

but the SEC has a mandate over security-based swaps. The FTC 

has a mandate over ordinary swaps. For an entity that is trying 

to put those rules into place, that is an extremely high cost. So 

Dodd-Frank is listed with those kinds of examples. 

Mr. WALLISON. I think there are other examples in the Volcker 

Rule itself. The Volcker Rule is internally contradictory, from my 

perspective. And that is one of the reasons why it took so long for 

it to be put in final form. The Volcker Rule says you cannot engage 

in prop trading, which means that you cannot buy and sell securities—they are talking here about debt securities—for your own account. But it also says that you can continue your market-making 

activities and your hedging activities. Both of those are extremely 

important for the markets. 

Market-making is vital for the markets because if you want to 

sell a fixed-income security of some kind, there is always a very 

thin market. You may not be able to find a buyer in the world at 

large. You have to go to someone who will actually buy your security, or sell you one. This is because of the thinness of the market. 

That is a market-maker. When a market-maker buys or sells, it is 

very difficult to tell the difference between what is a market-making activity and what is a prop trading activity. And as long as that 

is true, banks are going to be very fearful of engaging in marketmaking when there is some danger that they might be accused of 

violating the prop trading rules. 

Mr. BARR OF KENTUCKY. Mr. Wallison, I think you have included 

in your prepared testimony also, that in addition to its role, its 

mission of identification of a risk to financial stability, FSOC is 

also supposed to coordinate regulation among the multiplicity of 

regulatory agencies. I take it from your testimony that FSOC has 

failed to properly coordinate and limit this—the contradiction that 

we see in a lot of these regulations. 

Mr. WALLISON. Yes. I don’t see any evidence that the FSOC has 

attempted to coordinate. It has attempted to press its own views— 

these are the views of the Treasury Department—on other agencies, such as the SEC. But it hasn’t attempted to bring the agencies 

together to coordinate policies. At least from the outside, it is very 

difficult to see that is happening. 

Mr. BARR OF KENTUCKY. In my remaining time, let me just shift 

over to something else. A lot of the focus of the hearing so far has 

been on the proliferation of regulations and compliance costs. But 

let me ask the panel just for your views on the tendency of financial regulators to circumvent the Administrative Procedures Act reVerDate Nov 24 2008 12:32 Aug 26, 2014 Jkt 088531 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\88531.TXT TERRI
19 

quirements related to notice and comment rulemaking—so-called 

‘‘informal rulemaking’’—where there is a requirement of notice and 

comment. And we see this in particular with the CFPB, how they 

have been governing on an ad hoc basis. Not through rulemaking, 

which kind of sets predictable standards before, but instead, after 

the fact, there is kind of ad hoc enforcement actions or guidance 

where notice and comment and the opportunity for regulated parties of the consumers to participate in rulemaking is not available. 

Can you all comment on whether or not you are seeing a lot of 

that guidance, informal interpretive memorandum, general statements of policy as a means of circumventing rulemaking? And what 

effect does that have on financial markets? 

Ms. BENNETTS. That was a phenomenon that we saw after the 

business roundtable decision a couple of years ago, where an ACC 

rule—a proxy rule was overturned by the court. And since then, we 

have been seeing regulatory agencies, especially where they are not 

100 percent sure that they can do a cost-benefit analysis or a full 

analysis as required by the rules, they release guidance. And we 

saw, actually, to Peter’s point about the FSOC designation rule, if 

you looked at the rule it was actually a very limited rule, where 

everything, all of the meat, was in the guidance. 

But the guidance was just guidelines, and so you couldn’t, in 

fact—and I suppose you could comment on them, but it wouldn’t 

really be taken into account because it wasn’t part of the rule. 

Chairman MCHENRY. The gentleman’s time has expired. And I 

would announce to the committee, with their indulgence, with 15 

minutes to vote on the House Floor just announced, a series of 

votes, with the Members’ cooperation we will be able to get everyone in before we adjourn for the votes. That would be the best 

thing for the witnesses and for members, as well. 

So we will now recognize Mr. Heck for 5 minutes, followed by 

Mr. Rothfus for 5 minutes, and then finally the ranking member, 

Mr. Green, for his traditional last series here. 

Mr. Heck? 

Mr. HECK. Thank you, Mr. Chairman. And as someone who is to 

the right of the Chair, sitting to the right of the Chair, I am an 

individual who comes to this task believing that, in fact, it is possible to overdo it on the regulatory side and to stifle competitiveness. You can get them wrong, you can have too many, you can 

make them too complex and the like. But at the end of the day, 

I am fascinated by the pursuit of the right balance between competitiveness and stability. I see them as values, both worthwhile 

and often in competition with one another. 

And in that spirit, Mr. Wallison, if I can pick on you briefly, you 

said something earlier that fascinated me within this paradigm. 

And I am paraphrasing, but I think accurately and in keeping with 

the spirit of your remark, that regulations had brought financial 

institutions to their knees. What is the evidence of that? 

Mr. WALLISON. This is a really interesting question. And I wish 

there was more attention paid to it. When economists look at the 

reasons that we are having such a slow recovery from the financial 

crisis, they blame the Fed. And, to some extent, people blame the 

Affordable Care Act. But no one is spending time looking at the 

costs that are imposed on financial institutions by regulations. 

20 

There is a very small paragraph in my prepared statement that I 

would offer to you. And that is an article recently in the newspapers about JPMorgan Chase. 

JPMorgan Chase hired 3,000 compliance officers this year. They 

hired 7,000 compliance officers last year. But they are cutting their 

total employment by 5,000 people this year. What that means to 

me is that JPMorgan Chase is now focusing a lot—not exclusively, 

but a lot—on the regulations they face. And they are calling back 

into headquarters, or eliminating, the people who actually go out 

and offer financing to business. 

The result of that, of course, is that there is less interest in financing, there is less credit going to businesses, there are fewer 

jobs, and much less economic growth. However, we don’t hear 

economists who are studying the economy focusing on that issue. 

So I think you have raised an important one. We should be looking 

at the question of the regulatory costs not only in dollars, but in 

terms of what it does to people’s will and people’s interest in hiring 

others to go out and do— 

Mr. HECK. Fair enough, Mr. Wallison. Let the record also reflect 

that we have added jobs in the private sector every month for 

something like 50 months. And more importantly, and I think 

frankly, sir, in absolute stark contrast with your assertion, the 6 

largest banks in America reported $76 billion in profits in 2013— 

$76 billion. That is $6 billion short of their high in 2006, when the 

housing market was white hot, which hardly seems to me to translate—excuse me, sir, my time—to being brought to their knees. 

Professor Barr, on the other end of that teeter-totter—and I am 

concerned about both sides—is the stability side. I realize you are 

not an economist, but I would appreciate and respect your insight 

or opinion nonetheless. If we had been at full employment last 

year, economists estimate that we would have grown by an additional trillion dollars. And that is not full employment in terms of 

zero; that is full employment as is generally accepted. And yet, we 

are significantly below that and have been since the crash. 

Is it not also true that in terms of the issue of wealth creation 

and job creation that if we err too much on the side of the teetertotter for competitiveness without enough regard to stability, that 

we do not just material harm to the economy, but structural and— 

if not permanent long-term, as we certainly have experienced in 

the last 5 years and as we absolutely experienced in the many 

years after the Great Depression onset? 

Mr. BARR. I agree with you. I think that having good, strong regulations is good for financial stability and that is good for growth. 

Chairman MCHENRY. The gentleman’s time has expired. 

We will now recognize Mr. Rothfus for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. I would like to talk a 

little bit about the new Basel III requirements and their complexities. Specifically, I will go to Ms. Bennetts and Mr. Wallison. So 

if you could—as I give you the background here. The new Basel III 

capital requirements introduce enormous complexity to the capital 

structure of banks. Multiple protective buffers are included which 

contain incentives to maintain or increase different types of capital. 

The regulators have substantial discretion to dictate how much 

and what type of capital shall be held at what times. Furthermore, 

21 

by maintaining the authority to do change risk weights when 

measuring the risk-weighted assets of a bank, banks can be forced 

in and out of different financial products at different times. Given 

the complexity of the measures of assets and capital, the market’s 

ability to determine the true capital position of a bank will be thoroughly clouded. The uncertainty arising out of the regulators’ discretion to modify measures of capital and assets will cause a permanent concern that will constrain banking business and increase 

that industry’s dependence on government. 

It is likely that, given the discretion that regulators have provided themselves, regulators will feel greater responsibility over a 

bank’s success or failure. Hence, the manipulation of these capital 

and asset variables may occur. Ms. Bennetts, given the complexity 

of the Basel III cap—Basel III-based capital requirements, is it 

more difficult to discern the true level of regulatory capital held by 

a financial institution? 

Ms. BENNETTS. It is certainly difficult in the sense—I think that 

the banks would release, obviously, their tier one capital, and that 

would be public knowledge and you would be able to measure it. 

But one thing I want to add to that is that the problem with a riskweighting system and, more importantly, a risk-weighting system 

where everybody uses the same model—this isn’t a bank’s internal 

risk model that it has kind of come up with of its own markets 

evaluations, everybody is using the same model—is that you have 

increasing asset concentration in certain pools of assets. 

Which, as you correctly noted, are the assets that the regulators 

have determined are safe assets at a given point in time. That does 

not necessarily mean that the bank is better capitalized. Because 

if there is a run on that particular type of asset—and we saw pre2008, as Mr. Wallison mentioned earlier—everybody thought that 

triple-A rated mortgage-backed securities were a safe asset. So that 

is a real problem and a real flaw in the risk-weighting system. 

And because of the complexity, and also, you don’t just have the 

Basel III capital standards, you also have the liquidity coverage 

ratio and all these other measures of stability. Now, I do think 

banks need to be well-capitalized. That is not the argument. The 

question is, how do you capitalize them in a way that doesn’t create 

systemic risk? 

Mr. ROTHFUS. Mr. Wallison, would you think that this level of 

complexity imposes significant costs and uncertainty on financial 

institutions and on those that invest in them? 

Mr. WALLISON. Of course. The more complex regulations are, the 

more attention has to be paid to them by the regulated industry. 

They have to hire more people, they have to hire more accountants 

to do all this work for them. And then there becomes, as Louise 

Bennetts’ just suggested, a lot of difficulty in people outside trying 

to understand how the bank has put together its capital position. 

I would suggest that we would be much better off if we had a simple leverage ratio for all banks, rather than these complex rules 

that began with Basel I and have now gone through Basel II, and 

Basel III. 

Mr. ROTHFUS. Would these complex rules be prone to manipulation by regulators and subject to substantial political pressure? 

22 

Mr. WALLISON. That is harder to say. I don’t know whether regulators would manipulate these things for political purposes. But I 

would say that there is only one way, really, to prevent risk in this 

world. And that is diversification. The trouble with regulation is 

that it tends to make everyone do exactly the same thing. And to 

the extent they are doing the same thing, as occurred with the 

Basel capital rules, they all fail at the same time when something 

happens in the world that no one expected. So we have to start 

looking at the Basel rules and other regulations from this perspective, and say— 

Mr. ROTHFUS. Can you comment on how these capital requirements might impact on economic growth? 

Is it the complexity of these regulations? 

Mr. WALLISON. It does have an impact on economic growth because the banks, then, are pushed into certain areas that they have 

to focus on because they have to comply with the regulations. And 

that starves other areas of the economy from receiving adequate 

amounts of credit. So the economy is shaped, in a way, by where 

the banks are directed to go. I want to mention one other thing, 

and that is we are talking about banks all the time. This hearing 

was about banks. 

The most important funder of the U.S. economy are the securities markets and the capital markets. In my prepared testimony, 

there is a chart which shows that the banks are tiny in terms of 

their financing of growth and business in the United States. The 

securities markets are where all the action is, and— 

Chairman MCHENRY. We are going to have to leave it there, Mr. 

Wallison. The gentleman’s time has expired. 

The ranking member is now recognized for 5 minutes. And with 

2 minutes left to vote on the Floor, I will leave it to the gentleman 

to determine when we should leave. 

Mr. GREEN. I assure you, Mr. Chairman, I will consider the time. 

I would like to ask unanimous consent to place in the record the 

testimony of Mr. Chris Brummer, who was originally scheduled to 

be a witness but could not make it today because of the rescheduling. 

Chairman MCHENRY. Without objection, it is so ordered. 

Mr. GREEN. Thank you. I will be very terse with this. Mr. 

Wallison, you indicate that bad laws seem to be more of a problem 

than a lack of regulation. Permit me to ask you quickly, what bad 

law could we have repealed such that AIG would not have been a 

liability to the world economy? What bad law could we have repealed? 

Mr. WALLISON. I don’t think AIG did what it did because of a bad 

law, although I don’t think— 

Mr. GREEN. I assume, then, that you do agree that there are 

times when we have to have additional laws? 

Mr. WALLISON. Sure. 

Mr. GREEN. That it is just not a question of repealing bad laws. 

Mr. WALLISON. Absolutely. Regulation is necessary in some respects. It can be overdone, as I suggested. 

Mr. GREEN. It can be overdone. And do you agree that it can be, 

in the sense of not having enough, underdone? That you can have 

a circumstance where you don’t have enough regulation? 

23 

Mr. WALLISON. Sure. In principle, you can; you might not have 

enough regulation. 

Mr. GREEN. All right. And do you agree that we do need some 

way to wind down these systemically—these very huge corporations, that we call SIFIs, in the event they become a liability to the 

world economy? 

Mr. WALLISON. No, I don’t agree with that. 

Mr. GREEN. Do you think— 

Mr. WALLISON. First of all, I don’t think we understand what 

SIFIs are— 

Mr. GREEN. Excuse me, if I may ask quickly because time is of 

the essence. Would you just allow them to go into bankruptcy? 

Mr. WALLISON. Yes, of course. I would allow large firms and 

small firms to go into bankruptcy. That is the way the market 

works. 

Mr. GREEN. And do you agree that Dodd-Frank provides bankruptcy as a remedy? 

Mr. WALLISON. No, it doesn’t. 

Mr. GREEN. You do not agree that Dodd-Frank has bankruptcy 

as a remedy? 

Mr. WALLISON. No, it does not. 

Mr. GREEN. Oh, well, you and I differ. My time has expired, and 

I apologize to you for being abrupt. I will yield back to you, Mr. 

Chairman. 

Chairman MCHENRY. I thank the ranking member, and I want 

to apologize to the witnesses for when they called votes today. But 

I certainly appreciate your willingness to testify and to take Members’ questions. I ask unanimous consent to submit for the record 

letters from the National Association of Federal Credit Unions and 

the Chamber of Commerce of the United States of America. Without objection, they will be entered into the record. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

I want to thank our witnesses for your testimony, for your time, 

and for your input. And without objection, this hearing is adjourned. 

[Whereupon, at 3:18 p.m., the hearing was adjourned.] 

(25) 

A P P E N D I X 

March 5, 2014 

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