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THE IMPACT OF THE VOLCKER RULE 

ON JOB CREATORS, PART II 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 5, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–62 

( 

(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 

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) 

C O N T E N T S 

Page 

Hearing held on: 

February 5, 2014 .............................................................................................. 1 

Appendix: 

February 5, 2014 .............................................................................................. 65 

WITNESSES 

WEDNESDAY, FEBRUARY 5, 2014 

Curry, Hon. Thomas J., Comptroller of the Currency, Office of the Comptroller of the Currency ......................................................................................... 11 

Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance Corporation ........................................................................................................................ 12

Tarullo, Hon. Daniel K., Governor, Board of Governors of the Federal Reserve 

System ................................................................................................................... 8 

Wetjen, Hon. Mark P., Acting Chairman, Commodity Futures Trading Commission .................................................................................................................. 14 

White, Hon. Mary Jo, Chair, U.S. Securities and Exchange Commission .......... 9 

APPENDIX 

Prepared statements: 

Moore, Hon. Gwen ............................................................................................ 66 

Curry, Hon. Thomas J. ..................................................................................... 67 

Gruenberg, Hon. Martin J. .............................................................................. 80 

Tarullo, Hon. Daniel K. .................................................................................... 98 

Wetjen, Hon. Mark P. ...................................................................................... 105 

White, Hon. Mary Jo ........................................................................................ 110 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Ellison, Hon. Keith: 

American Banker article by Donald R. van Deventer entitled, ‘‘Volcker 

is Right. Prop Trading Kills,’’ dated February 20, 2012 ............................ 118 

Curry, Hon. Thomas J.: 

Written responses to questions submitted by Representatives Garrett, 

King, Ross, Fincher, Hultgren, Hurt, and Ellison ...................................... 121 

Gruenberg, Hon. Martin J.: 

Written responses to questions submitted by Representatives Garrett, 

Ellison, Luetkemeyer, Hurt, Hultgren, Fincher, Ross, and King ............. 132 

Tarullo, Hon. Daniel K.: 

Written responses to questions submitted by Representatives Fincher, 

Garrett, Hultgren, Hurt, King, Moore, and Ross ....................................... 148 

White, Hon. Mary Jo: 

Written responses to questions submitted by Representatives Hurt, Garrett, King, Ross, Fincher, and Hultgren ..................................................... 165 

(1) 

THE IMPACT OF THE VOLCKER RULE 

ON JOB CREATORS, PART II 

Wednesday, February 5, 2014 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Royce, Lucas, 

Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Mulvaney, 

Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, Rothfus; Waters, 

Maloney, Velazquez, Sherman, Meeks, Capuano, Lynch, Scott, 

Green, Cleaver, Ellison, Himes, Peters, Carney, Foster, Kildee, 

Murphy, Sinema, Beatty, and Heck. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

This hearing is entitled, ‘‘The Impact of the Volcker Rule on Job 

Creators, Part II.’’ Members will recall that Part I was held on January 15th, when we heard from our private sector witnesses. 

Today, we will hear from the regulators who promulgated the rule. 

I now recognize myself for 5 minutes for an opening statement. 

During our last Volcker Rule hearing, I mentioned receiving correspondence from a constituent of mine, Joseph of Mabank, Texas, 

who wrote me, ‘‘I am a disabled veteran. I have been without work 

for over a year. All I want is to have a good paying job.’’ 

I receive way too many letters like this from folks like Joseph 

who are struggling to make ends meet, struggling in this struggling 

economy. There is William, who lives in Ben Wheeler, who says, ‘‘I 

have been out of work for the longest time, since my teenage 

years.’’ Tina from Canton wrote me, ‘‘I haven’t been able to find a 

job suitable for my family’s needs.’’ 

I do not recall a time, ever in my lifetime, when the challenges 

of upward mobility and economic opportunity for low- and moderate-income Americans have been greater. Not surprisingly, I also 

do not ever recall in my lifetime when the regulatory red tape burdens on our job creators in capital markets have been greater. I believe, as do most, that there is a clear, direct causal link between 

the two. 

Today’s exhibit: the 932-page complex, confounding, confusing, 

and convoluted Volcker Rule. Like most of the other 400 rules in 

the Dodd-Frank Act, the Volcker Rule is aimed at Wall Street, but 

2 

hits Main Street, and regrettably people like Joseph and William 

and Tina have become collateral damage. 

The Volcker Rule, I believe, remains a solution in search of a 

problem. Of the 450 financial institutions that failed during or as 

a result of the financial crisis, not one fell because of proprietary 

trading. In fact, financial institutions that varied their revenue 

streams were better able to weather the storm, keep lending, and 

support job growth. 

Instead, bank failures, as we all know, came largely from a concentration in lending in the poorly underwritten residential real estate and sovereign debt markets. And who helped steer them into 

these markets? Regrettably, Washington. Between Fannie Mae and 

Freddie Mac’s affordable housing goals, the CRA, and our SRO designations, just to mention a few, Washington regulators regrettably 

incented and blessed it all. 

The great public policy tragedy of the financial crisis was not 

that Washington failed to prevent the crisis, but instead that 

Washington helped cause it. Now, with the Volcker Rule, Washington is doubling down on its catastrophic mistakes. 

With something as large, momentous, and as anticipated as the 

Volcker Rule, surely it must offer great benefits to our financial 

system. But what are they? Paul Volcker himself has said that proprietary trading was not a central cause of the crisis. Former 

Treasury Secretary Geithner has expressed a similar view. And I 

am unaware of any economist or regulator who has been able to 

quantify precisely the Volcker Rule’s benefits. 

Many say the rule reduces risk in the financial system. That may 

be true. The studies that I have seen are mixed at best. And I remind everyone that without risk, there is no investment. Less investment means less capital formation. Less capital formation 

means fewer job opportunities for Joseph, William, and Tina, and 

the tens of millions who remain underemployed and unemployed in 

this economy. 

If Washington believes we need to remove more risk from the 

system, perhaps then we should concentrate on substantially outlawing mortgage risk, which is at the epicenter of the crisis, but 

arguably the CFPB’s QM rule has largely accomplished that already. 

As the benefits of Volcker remain questionable, evidence is 

mounting that the cost will be enormous. There have been 18,000 

comment letters, the vast majority of which have been negative, 

that ultimately the rule will be costly to hard-working American 

taxpayers. The Public Utility Commission in my native Texas has 

warned that the Volcker Rule threatens my constituents with 

‘‘higher and more volatile electricity prices.’’ 

Then there are the regulators’ own estimates which show that 

complying with Volcker will require 6.2 million hours. That is 

hours in capital which could have been devoted to growing our 

economy and creating more jobs. There is research out of Washington University that Volcker will take $800 billion out of our 

economy, the equivalent of $6,900 out of every American household’s paychecks. There is ample testimony before our committee 

that companies will be faced with artificially higher borrowing 

costs and will be forced to hoard more cash. 

3 

As the evidence has mounted, The Wall Street Journal has editorialized that the Volcker Rule creates ‘‘a limitless supply of ambiguity.’’ And The Economist has stated that the rule gives us ‘‘less 

liquid markets, higher transaction costs, a weaker financial system, 

and, as usual, richer lawyers.’’ 

Based on the evidence, it appears that the costs outweigh the 

benefits, but the regulators who promulgated the rule don’t know 

for certain because none of the agencies conducted a cost-benefit 

economic analysis. In other words, they did not examine whether 

the Volcker Rule actually helps or hurts Joseph, William, Tina, or 

any of the others. Some say we need the Volcker Rule to hold Wall 

Street accountable. Wall Street must be held accountable, but 

Washington must be held accountable as well. 

Wall Street is going to make money with or without the Volcker 

Rule. It is Americans on Main Street, the people who sent us here, 

who are being hurt daily in the regulatory tsunami of Obamacare, 

Dodd-Frank, and now the Volcker Rule. This committee and this 

Congress must and should do better. 

The Chair now recognizes the ranking member, Ms. Waters, for 

4 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

I would like to welcome our distinguished witnesses to today’s 

hearing and thank them for working tirelessly to complete this crucially important rule. Thanks to their hard work, we are making 

progress toward a stronger, sounder financial system. It has been 

5 years since the worst of the financial crisis. Our Nation is still 

taking stock of the causes and the damage done. Though we can’t 

identify every cause of the crisis with absolute certainty, we do 

know that certain types of risky behavior were major contributors. 

One of these types of behavior was proprietary trading by big 

banks, of which we saw a significant increase in the buildup to the 

collapse. In fact, at the biggest banks, proprietary trading revenues 

steadily increased in the lead-up to the crisis as banks acquired 

massive positions in subprime mortgage-backed securities. These 

positions were tremendously profitable until the music stopped and 

the market for these securities crashed. And as we now know, 

losses from proprietary trading, among other factors, required taxpayers to step in to bail out the system. 

After the worst of the crisis, Congress enacted comprehensive 

Wall Street reform to ensure such an emergency would never happen again. Undoubtedly, a centerpiece of that reform was the 

Volcker Rule. I believe that a properly enforced Volcker Rule will 

protect American taxpayers from the consequences of risky bank 

behavior and make certain that banks insured by our Nation’s citizens get back to the core business of making loans and financing 

our small businesses. 

To our regulators who are here today, I commend you for working together so closely to ensure we have the strongest, most workable rule possible. During this important rulemaking, you have 

sought feedback from stakeholders across the spectrum, poring 

through tens of thousands of comments and holding dozens upon 

dozens of meetings. 

At the same time, you have already worked quickly and effectively to address issues related to the rule that have come up in 

4 

the last month, including the issue related to collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS). 

I am very pleased with how you have managed to work collaboratively across your agencies. And given that the strong and consistent enforcement of the Volcker Rule is one of my top priorities, 

I am even more pleased that you have formed a working group 

which will allow your agencies to better coordinate on implementation of the rule across the financial sector. 

My understanding is that your agencies have already begun to 

work, holding an initial meeting to discuss coordination of responses and supervision of financial institutions. This type of cooperation is to be commended and is critical to ensuring that the 

agencies’ implementation of the Volcker Rule is strong, coordinated, and effective. 

Simultaneously, I hope that your agencies will take advantage of 

the long lead-up time afforded to you to collect data from banking 

entities which will inform how best to coordinate enforcement. 

I would like to once again thank the witnesses for appearing before this committee today. I look forward to working with you to 

ensure our regulators are faithfully enforcing this rule, which is 

crucial to the success of the Wall Street Reform Act. 

I look forward to the witnesses’ testimony, and I will yield 30 

seconds to the gentlelady from New York. 

Mrs. MALONEY. Thank you. And I thank the ranking member for 

yielding. 

And in all due respect to our chairman, I thank you for you calling this hearing, but when you said that the Volcker Rule is a solution in search of a problem, I would say that the Americans who 

suffered a $16 trillion loss in our economy, the loss of their homes, 

the loss of their jobs, and the loss of their savings are grateful that 

Congress acted in a way to try to prevent it in the future, and the 

Volcker Rule is an important part of the Dodd-Frank reform bill. 

Thank you for yielding. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, the Chair of our Capital Markets Subcommittee, for 21⁄2

minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Nearly 31⁄2 years after enactment of Dodd-Frank, the government’s rulemaking assembly line continues to bury American job 

creators with an avalanche of red tape. And so today, we meet 

again to discuss yet another example of government rulemaking 

gone wrong, the so-called Volcker Rule. 

Instead of taking the time to address the causes of the financial 

crisis, such as oversubsidization of the housing market, and the 

Federal Reserve’s failed regulatory monetary policy, Congress does 

come up with a solution in search of a problem: Exhibit A, the 

Volcker Rule, that tries to ban proprietary trading, which did not 

cause the financial crisis. 

And while the regulators here today had no choice but to draft 

this rule, they appear to have made the situation worse by failing 

to coordinate with each other and by ignoring the legal requirements for agency rulemaking. For example, despite receiving over 

19,000 comment letters, and making significant changes to the 

5 

Volcker Rule, the regulators failed to repropose the new rule for 

public comment. As a result, regulators are already being asked to 

address, after the fact, a variety of problems with the rule that 

threaten the ability of American companies to grow and make jobs. 

The regulators also failed to support the Volcker Rule with an 

adequate economic analysis, as required by law. Without this basic 

analysis, we really don’t know the detrimental effect it will have 

on the economy and those who invest in it. This is simply unacceptable. 

Another major concern is that banking regulators were very selective and counterproductive in the use of safety and soundness 

authority. They had no problem concocting a rationale to exempt 

potentially very risky foreign sovereign debt that could actually 

make banks less safe and sound, but they have refused to use the 

same authority to exempt CLOs from the rule, a move that actually 

makes them safer. Not to mention the fact that Congress never intended for CLOs to be covered in the first place. 

Last, but not least, there is the apparent inability of the regulators to cooperate and coordinate during this process, with one 

news report indicating that regulators agreed to negotiate the rule 

‘‘only when tempted by fast food fried chicken.’’ This, coupled with 

the agencies issuing a separate release and setting different implementation deadline, raises the troubling question of how the 

Volcker Rule is going to be implemented and enforced in a rational 

and coherent manner. 

All of this combined, Mr. Chairman, given all these problems, I 

believe it is time to seriously consider consolidating some of these 

agencies, perhaps creating a more streamlined, efficient, and accountable financial regulatory system. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Peters, for 2 minutes. 

Mr. PETERS. Thank you, Mr. Chairman. 

And I would like to thank our witnesses for being here today and 

for all of your work in overseeing our financial system. 

I was first elected in 2008, during the very height of the financial 

crisis, and it was a very frightening time. Our Nation was shedding 

over 800,000 jobs per month. In my home State of Michigan, there 

were very real fears that this crisis would bring about the liquidation of General Motors and Chrysler. But now American automakers are creating jobs and are boosting sales, and our financial 

regulators are implementing the historic Dodd-Frank law, and our 

economy is growing. 

We can’t go backwards. We can’t go back to allowing the use of 

government-insured money to make highly speculative bets on 

prior bets and then again on other bets. These highly complex and 

speculative derivatives and other practices threatened the entire financial system. We can’t go back to shedding millions of middleclass jobs because of Wall Street overreach. 

American markets allocate capital more efficiently than anywhere else in the world, and I look forward to hearing how our regulators are balancing the need to protect investors while maintaining robust access to capital for entrepreneurs. 

6 

I yield back my time. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, the Chair of our Financial Institutions Subcommittee, Mrs. Capito, for 11⁄2 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. And I want to thank 

our witnesses for being here with us today. 

Two months ago, the agencies testifying before our subcommittee 

released the final Volcker Rule. Since the announcement of the 

final rule, this committee’s members have been inundated with 

concerns about the effect this complex rule—although the original 

intent of the rule was to limit trading activities of the largest 

banks, the final rule is having a measurable impact on Main Street 

businesses and financial institutions. Shortly after the rule’s release, bankers in West Virginia reached out to me with concerns 

about their ability to hold certain securities under the new rule. 

They feared that the rule’s requirement to divest certain assets 

would force them to take immediate write-downs. This would have 

had to occur within 2 or 3 weeks before the end of the calendar 

year. 

The agencies reacted and issued an interim rule on January 14th 

that provided some clarity on the ability of banks to invest in 

collateralized debt obligations backed by trust preferred securities. 

But questions still do remain. Although this interim rule is a step 

in the right direction, the majority of confusion could have been 

avoided if there had been a public comment on this section of the 

rule. 

No one discounts the complexity of the rule and the probability 

that there would be significant unintended consequences. Unfortunately, what we are left with is a situation where the only way for 

the public to comment on these policies is to file lawsuits or engage 

Congress. This is a disservice to the rulemaking process and the 

public. 

I urge the witnesses here today and the agencies they represent 

to swiftly address these outstanding issues. And I thank you for 

coming before the committee today. 

Chairman HENSARLING. The ime of the gentlelady has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 2 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

First of all, the Volcker Rule is very important. It does a very 

important thing in terms of protecting proprietary trading. But 

there is an area we need to look very carefully at, and that is the 

handling of what are known as CLOs. 

My understanding is that CLOs are products which help provide 

large amounts of credit to small businesses. They are debt securities, and they performed well through the greatest financial crisis 

of our time, and they continue to perform well. They are not toxic. 

They didn’t cause the problem. Banks bought this CLO debt because they were prudent investments which offered a reasonable 

rate of return. And included among these banks are numerous 

small and regional and community banks. 

But here is the rub in this: Because of interpretation of the final 

rules of Volcker, of implementing Volcker, these same banks could 

very well face a situation where they have to dump $80 billion 

7 

worth of this debt in a fire sale. If these banks get 90 cents on the 

dollar back, we are talking about wiping out $8 billion of bank capital only because of what is conceived to be overly broad rulemaking. 

So it is my hope that in this discussion today we can have a clear 

understanding of the interaction of CLOs, why this is taking place, 

and how we can exercise the situation so that it helps our financial 

system and not put it in sort of a straightjacket here. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, the Chair of our Oversight and Investigations Subcommittee, for 1 minute. 

Mr. MCHENRY. In the last 31⁄2 years, mounting evidence affirms 

that Dodd-Frank’s more than 400 rules continue to miss the mark. 

At its core, Dodd-Frank irresponsibly disregards the causes of the 

financial crisis, namely, Fannie and Freddie, failed prudential regulation, and off balance sheet vehicles. Also, instead of explicitly 

implementing regulations which not only codified Dodd-Frank’s 

taxpayer-funded bailouts, but also recklessly impeded our economic 

growth and our international competitiveness. 

In December, the hasty implementation of the Volcker Rule 

upheld Dodd-Frank’s dangerous reputation when all five regulators 

refused to subject the rule to rigorous economic analysis. By refusing to repropose the rule, the Obama Administration and the regulators here today at this hearing have gambled on an economically 

unproven rule that does not get to the root of the last financial crisis and may, in fact, be at the root of the next one. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison, for 2 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman. 

I want to congratulate you, the regulators, for your outstanding 

collaborative and collective effort to implement the Volcker Rule. It 

is a major step toward ensuring that Americans will not be called 

upon again to repeat expenditures like the Troubled Asset Relief 

Program (TARP). TARP was a $700 billion investment which was passed in 2008. 

It buoyed more than 800 financial institutions during the financial 

crisis. The Volcker Rule will also stop high-risk investment trading, 

such as JPMorgan Chase’s (JPMC’s) London Whale, the enormous 

investment by JPMC’s investment division, which resulted in the 

loss of more than $6 billion. 

The creation of the new traffic laws for Wall Street is complicated, and we must all pay attention to your regulatory agencies’ 

move forward with implementation and enforcement. I strongly 

support robust regulation, which means that I want to see greater 

funding for the SEC and the Commodity Futures Trading Commission (CFTC). 

Of course, I urge our regulators here to be open and receive comment, as you so amply have. But I appreciate your efforts over the 

past few years to improve the rules of the road for the financial 

markets to reduce volatility and generate economic activity. You 

have achieved this in your balanced and clear rule. 

8 

And I want to say that for the many people who act as if we did 

not have a catastrophic financial crisis just a few years ago, and 

behave as though you just started writing rules all on your own accord, I sympathize with the frustration you must feel with that. 

But at the end of the day, I think we have a safer financial system 

because of the efforts that you have put forward. Thank you. 

Chairman HENSARLING. The gentleman yields back. 

Today, we welcome the heads of the five regulatory agencies that 

have developed, promulgated, and voted to approve the Volcker 

Rule. First, the Honorable Daniel Tarullo, who is a Governor on 

the Board of Governors of the Federal Reserve System, a position 

he has held since 2009. Previously, he served as a professor of law 

at Georgetown, and a senior fellow at the Council of Foreign Relations and the Center for American Progress. 

The Honorable Mary Jo White currently serves as the Chair of 

the U.S. Securities and Exchange Commission, a position to which 

she was confirmed last April. Before that appointment, Ms. White 

served as the U.S. Attorney for the Southern District of New York. 

The Honorable Thomas Curry was sworn in as the Comptroller 

of the Currency in April of 2012. Prior to his service at the OCC, 

Mr. Curry served as a Director of the FDIC, and he is chairman 

of the NeighborWorks America board of directors. 

Martin Gruenberg is the Chairman of the Federal Deposit Insurance Corporation, a position he has held since 2012. We welcome 

him back to Capitol Hill. He previously served on the Senate Banking Committee for Senator Sarbanes, clearly not as prestigious as 

having served as a staffer on the House Financial Services Committee, but we welcome you back to the Hill nonetheless. 

Last, but not least, Mark Wetjen currently serves as the Acting 

Chairman of the Commodity Futures Trading Commission. He has 

been a CFTC Commissioner since October 2011. We welcome him 

back to the Hill, as well. He too bears the burden of being a former 

Senate staffer of the Senate Banking Committee. 

Without objection, each of your written statements will be made 

a part of the record. Each of you should be familiar with the system of our green, yellow, and red lighting system. I would ask that 

each of you observe the 5-minute rule. 

Mr. Tarullo, you are now recognized for a 5-minute summary of 

your testimony. 

STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. TARULLO. Thank you very much. Chairman Hensarling, 

Ranking Member Waters, and members of the committee, I appreciate the opportunity to testify on the final interagency regulation 

implementing the Volcker Rule. 

With respect to this and all other provisions of the Dodd-Frank 

Act, the goal of the Federal Reserve is to implement the statute in 

a manner that is faithful to the language of the statute and that 

maximizes financial stability and other social benefits at the least 

cost to credit availability and economic growth. 

The basic approach of the final rule is generally consistent with 

that adopted in the proposed rule. But the many comments we reVerDate Nov 24 2008 17:06 Sep 19, 2014 Jkt 088524 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\88524.TXT TERRI
9 

ceived helped us make useful changes and clarifications throughout 

the final rule. Also, of course, the London Whale episode allowed 

staff to test the procedural and substantive requirements of the 

proposed rule against a real-world example of what should not happen in a banking organization. 

The final rule has been modestly simplified from the 2011 proposal, particularly the portion dealing with proprietary trading. 

Much of the remaining complexity lies in the parts of the rule dealing with covered funds, which are driven largely by the specific requirements of the statute. 

Because the proprietary trading part of the regulation tries to 

steer a middle course between one-size-fits-all requirements on the 

one hand and very specific requirements for all kinds of covered activity on the other, implementation will be particularly important 

in continuing to shape the Volcker Rule. We have extended the conformance period until July 2015 so as to allow the agencies more 

time to collect relevant data from large banking organizations and 

develop additional guidance, and to allow firms more time to put 

appropriate internal mechanisms in place. 

For example, the metrics to be reported by the largest banking 

organizations will help firms and regulators distinguish prohibited 

proprietary trading and high-risk trading strategies from legitimate market making, while taking account of the differences in 

particular markets and instruments. More generally, one would expect that a good many of the uncertainties will be reduced over 

time as both banking entities and regulators gain experience with 

this new regulatory framework. 

Of course, to reach this point, the five agencies represented here 

will need to coordinate their work. Because the bulk of the activities encompassed by the statute take place in U.S. broker-dealers 

and national banks, entities for which the Federal Reserve is not 

the primary supervisor, we will have a somewhat lesser role in the 

Volcker Rule implementation process. But we still have an important role to play. Shortly after adopting the Volcker Rule, the five 

agencies agreed to create an interagency working group to help ensure consistency in application of the final rule to banking entities 

within their respective jurisdictions. That group has already begun 

to meet. 

Finally, I would note that the Volcker Rule alone cannot assure 

the safety and soundness of trading operations. It is critical that 

all our agencies take an approach in monitoring constraining attendant risks in our largest financial institutions that is consistent 

with these broader safety and soundness aims. Capital regulation 

remains at the core of that comprehensive approach. 

Thank you for your attention, and I would be pleased to answer 

any questions you may have. 

[The prepared statement of Governor Tarullo can be found on 

page 98 of the appendix.] 

Chairman HENSARLING. Chair White, you are now recognized. 

STATEMENT OF THE HONORABLE MARY JO WHITE, CHAIR, 

U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. WHITE. Thank you very much, Chairman Hensarling, Ranking Member Waters, and members of the committee. Thank you for 

10 

inviting me to testify about the final rule implementing Section 619 

of the Dodd-Frank Act, commonly referred to as the Volcker Rule, 

adopted under the Bank Holding Company Act on December 10th 

by the Federal banking agencies, the SEC, and the CFTC. 

The final rule carries out the mandate of Congress. The rule reflects an extensive effort by all five agencies to design a regulatory 

framework that is consistent with the language and purpose of the 

statute and that preserves diverse and competitive markets. 

Throughout the rulemaking process, Commission staff played a 

critical, constructive, and collaborative role, bringing its expertise 

to bear as a regulator of markets, market intermediaries, asset 

managers, and investment funds. The Commission, like the other 

agencies, received and reviewed thousands of comment letters on 

the statutory mandate and the proposed rules, and met with numerous market participants and other interested parties. 

The comments covered a wide spectrum of issues, including concerns about potential negative market and other economic impacts, 

as well as risks of evasion. The Commission, together with the 

other agencies, carefully considered and responded to these comments with a final rule that reduces the potential impacts on markets while also addressing concerns about evasion of the statutory 

requirements through a robust compliance program. 

It was very important, in my view, that all five agencies adopt 

the same rule under the Bank Holding Company Act and to apply 

and implement the rule consistently based on continuing consultation and collaboration. In developing and issuing the rule, Section 

619 of the Dodd-Frank Act imposed on all of the agencies obligations of coordination, consistency, and comparability. Market participants, investor advocates, and others also all called for a common rule that would be consistently applied. 

While the final rule in many respects is similar to the proposed 

rule, there are a number of changes which relate to areas of the 

Commission’s expertise that I would just like to very briefly highlight. 

The first area is the statutory exemptions from the ban on proprietary trading for market making and underwriting, which are 

necessary activities for raising capital and the healthy functioning 

of the U.S. markets. The final rule takes a measured but robust approach, benefitting from a consideration of commenter views on potential unintended market impacts, particularly with respect to liquidity and off-exchange markets. 

Another area is the implementation of the statutory provisions 

limiting the ability of banking entities to sponsor or invest in hedge 

funds and private equity funds. Responding to extensive comments, 

the final rule refines the definition of a covered fund to exclude certain entities, such as operational subsidiaries and joint ventures, 

which do not present the same risks as the covered funds targeted 

by the statute. 

A third area relates to the cross-border scope of the proposed 

rule, which is and was the subject of a number of comments focused on the potential competitive impacts and effects on liquidity. 

The final rule provides that so long as the trading decisions and 

principal risks associated with the activities of the foreign banking 

entity are located outside the United States, a foreign banking entiVerDate Nov 24 2008 17:06 Sep 19, 2014 Jkt 088524 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\88524.TXT TERRI
11 

ty may trade with U.S. entities, subject to certain conditions. The 

approach is designed to limit the risk to the United States arising 

from proprietary trading by foreign banking entities while creating 

a reasonable competitive parity between domestic and foreign 

banking entities and helping to ensure that U.S. investors can continue to benefit from liquidity provided by foreign banking entities. 

As we move forward, we must be alert to both unintended impacts and regulatory loopholes. We also appreciate that market 

participants will have an ongoing need for guidance regarding 

questions that will arise as they seek to comply with the final 

rules. To address these questions and concerns, as you have heard, 

the agencies have formed an interagency working group that will 

meet regularly to coordinate the agencies’ interpretations and implementation of the rule on a going-forward basis. 

Thank you for providing me the opportunity to testify today. I 

would be pleased to respond to questions. 

[The prepared statement of Chair White can be found on page 

110 of the appendix.] 

Chairman HENSARLING. Comptroller Curry, you are now recognized for 5 minutes. 

STATEMENT OF THE HONORABLE THOMAS J. CURRY, COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. CURRY. Chairman Hensarling, Ranking Member Waters, and 

members of the committee, thank you for the opportunity to testify 

today on the Volcker Rule. 

As you are aware, on December 10th, 2013, the OCC was one of 

five agencies that adopted a final rule to implement the requirements of Section 619 of the Dodd-Frank Act, known as the Volcker 

Rule. Consistent with the statute, the rule prohibits banking entities from engaging in proprietary trading and strictly limits their 

ability to invest in hedge funds or private equity funds. 

However, the rule does permit banks to continue engaging in important financial activities such as market making, underwriting, 

risk-mitigating, hedging, and trading in government obligations. 

The rule is designed to preserve market liquidity and allow banks 

to continue to provide important services for their clients while tailoring the compliance requirements to the size of the bank and the 

complexity of its activities. 

In developing the final rule, we carefully considered more than 

18,000 comments. Commenters raised significant and complex 

issues. They also provided thoughtful, although sometimes conflicting recommendations. My written statement describes several 

of the changes that the agencies made to the final rule in response 

to these comments. For example, some of the changes were designed to clarify how banks can continue to use hedging activities 

to reduce specific risks. Other changes were made to narrow the 

scope of funds covered under the rule. 

While the statute applies to banks of all sizes, not all banks perform the activities that present the risks the statute sought to address. Throughout the rulemaking, the OCC worked to minimize 

the burden the rule would place on community banks. I am pleased 

that under the final rule, community banks which trade only in 

12 

certain government obligations have no compliance requirements 

whatsoever. Moreover, community banks which engage in low-risk 

activities will be subject to minimal requirements. 

On an issue of particular importance to community banks and 

members of this committee, we also recently clarified that banks 

could continue to own collateralized debt obligations backed by 

trust preferred securities in a way that is consistent with the Collins Amendment to the Dodd-Frank Act. 

By contrast to expectations for community banks, the rule will 

require significant changes at large banks which engage in trading 

in covered fund activities. Most large institutions have been preparing for these changes since the statute became effective in July 

2012 and have been shutting down impermissible proprietary trading operations. Now that the final rule has been released, large 

banks will need to bring their trading and covered fund activities 

into compliance during the conformance period, which runs through 

July 21, 2015. 

Large banks will be subject to enhanced compliance requirements, which will include detailed policies, procedures, and governance processes. The CEOs of every bank subject to these enhanced 

compliance requirements must also provide annual attestations 

about their compliance programs. In addition, the largest trading 

bank will begin reporting on seven categories of metrics this summer. 

At the OCC, we are committed to maintaining a robust program 

to assess and enforce banks’ compliance with the Volcker Rule. We 

are developing examination procedures and training to help our examiners assess whether banks are taking appropriate action to 

bring their trading activities and investments into conformance 

with the rule. 

I am mindful of the need to ensure that the agencies provide consistency in the application of the rule itself. For this reason, the 

OCC led the formation of an interagency working group to respond 

to and collaborate on key supervisory issues which arise under the 

rule. I am pleased to also report that the interagency group held 

its first meeting in late January and will continue to meet on a regular basis to discuss application and enforcement of the rule. 

Thank you again for the opportunity to appear before the committee today, and I am more than happy to answer your questions. 

Thank you. 

[The prepared statement of Comptroller Curry can be found on 

page 67 of the appendix.] 

Chairman HENSARLING. Chairman Gruenberg, you are now recognized for 5 minutes. 

STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, 

CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Chairman Hensarling, Ranking Member 

Waters, and members of the committee, I appreciate the opportunity to testify today on behalf of the FDIC on the regulations to 

implement Section 619 of the Dodd-Frank Act, also known as the 

Volcker Rule. Mr. Chairman, I realize this may be one of those occasions where everything may have already been said, but not everyone said it. So I will try to be brief. 

13 

The purpose of the Volcker Rule is to limit certain risky activities 

of banking entities that are supported by the public safety net, 

whether through deposit insurance or access to the Federal Reserve’s discount window. In general, the rule prohibits banking entities from engaging in proprietary trading activities and places 

limits on the ability of banking entities to invest in or have certain 

relationships with hedge funds and private equity funds. 

After extensive interagency deliberations and careful analysis of 

the 18,000 comments received in response to the proposed regulation, the FDIC, along with the other agencies represented here 

today, adopted the Volcker Rule last December. The final rule is 

consistent with the proposed rule and reflects changes made in response to the substantive comments received during the rulemaking process. 

The proprietary trading restrictions of the rule seek to balance 

the prudential restrictions of the Volcker Rule while preserving 

permissible underwriting, market-making, and risk-mitigating 

hedging activities. The final rule also provides other exemptions 

from the proprietary trading prohibition, such as trading on behalf 

of a customer or in a fiduciary capacity. 

Perhaps the most challenging and complex of these exemptions 

has been the exemption for market-making activities. Under the 

final rule, the market-making exemption has been modified to reduce operational complexity and uncertainty for banking entities 

and at the same time to increase management accountability for 

ensuring that the requirements of the exemption are met. 

With respect to the risk-mitigating hedging exemption, the requirements of the exemption are generally designed to ensure that 

the banking entity’s hedging activity is limited to risk mitigating 

hedging in purpose and effect. For instance, hedging activity must 

be designed to demonstrably reduce or significantly mitigate specific identifiable risks of individual or aggregated positions of the 

banking entity. 

The final rule also prohibits banking entities from owning and 

sponsoring hedge funds and private equity funds, referred to in the 

final rule as covered funds. Commenters frequently noted that including all commodity pools as covered funds, as originally proposed, would be overly inclusive. The agencies broadly accepted 

this suggestion from commenters, resulting in a final rule that focuses the definition of covered funds on those commodity pools 

which have characteristics that are more closely aligned to those of 

a hedge fund or private equity fund. 

Also in response to concerns raised by commenters, the final rule 

provides compliance requirements that vary based on the size of 

the banking entity and the amount of covered activities it conducts. 

For example, the final rule imposes no compliance burden on banking entities that do not engage in activities that are covered by the 

Volcker Rule. 

We also recognize, as has been noted, that clear and consistent 

application of the final rule across all banking entities will be extremely important. To help ensure this consistency, the five agencies have formed an interagency Volcker Rule Implementation 

Working Group. The group has begun meeting and will meet reguVerDate Nov 24 2008 17:06 Sep 19, 2014 Jkt 088524 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\88524.TXT TERRI
14 

larly to address reporting guidance and interpretation issues to facilitate compliance with the rule. 

Mr. Chairman, that concludes my statement, and I will be happy 

to respond to questions. 

[The prepared statement of Chairman Gruenberg can be found 

on page 80 of the appendix.] 

Chairman HENSARLING. Thank you. 

And now, Chairman Wetjen, you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE MARK P. WETJEN, ACTING 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION 

Mr. WETJEN. Thank you, and good morning, Chairman Hensarling, Ranking Member Waters, and members of the committee. 

I am pleased to join my fellow regulators in testifying today. 

As this committee is well aware, the Commodity Futures Trading 

Commission was given significant rulemaking responsibilities 

through passage of the Dodd-Frank Act. The Commission has substantially met those responsibilities, with only a few rulemakings 

remaining. As a result, nearly 100 swap dealers have registered 

with the Commission. Counterparty credit risk has been reduced 

through the Commission’s clearing mandate. And pre- and posttrade transparency in the swaps market exists where it did not before. 

In recent weeks, the Commission finalized the Volcker Rule, 

which was one of our last major rules under Dodd-Frank. The Commission’s interest here, however, is relatively limited regarding the 

scope of and number of entities subject to its jurisdiction. 

I will now address some of the specific topics of interest that the 

committee identified before today’s hearing. 

A notable hallmark of the Volcker Rulemaking effort was that 

the market regulators went beyond the congressional requirement 

to simply coordinate. In fact, the Commission’s final rule includes 

the same substantive rule text adopted by the other agencies. 

Building a consensus among five different government agencies 

was no easy task, and the level of coordination on this complicated 

rulemaking was exceptional. More than 18,000 comments addressing numerous aspects of the proposal were submitted to the rulewriting agencies. Commission staff hosted a public roundtable on 

the proposed rule and met with a number of commenters. Through 

weekly interagency meetings, along with more informal discussions, Commission and other agency staff carefully considered the 

comments in formulating the final rule. 

The agencies were responsive to the comments when appropriate, 

which led to several changes from the proposed Volcker Rule. I 

would like to highlight just a few. 

The final Volcker Rule included some alterations to certain parts 

of the hedging exemption requirements found in the proposal. For 

instance, the final rule requires banking entities to have controls 

in place to their compliance programs to demonstrate that hedges 

would likely be correlated with an underlying position. The final 

rule also requires ongoing recalibration of hedging positions in 

order for the entities to remain in compliance. 

Additionally, the final rule provides the hedging related to a 

trading desk’s market-making activities is part of the trading 

15 

desk’s financial exposure, which can be managed separately from 

the risk-mitigating hedging exemption. Another modification to the 

proposal was to include under covered funds only those commodity 

pools that resemble, in terms of the type of offering and investor 

base, a typical hedge fund. 

With respect to the more recent interim final rule relating to 

TruPS, the Commission last month quickly and unanimously 

adopted it in an effort to assist community banks. This response 

was another example of the Commission responding promptly to 

compliance challenges presented to it and also demonstrated the 

enduring commitment of all the agencies here to ongoing coordination. 

Compliance with the Volcker Rule, including the reporting of key 

metrics, will provide the Commission important new information 

that will buttress its oversight of swap dealers and Futures Commission merchants, which are entities registered with the Commission that are subject to the rule. 

To ensure consistent, efficient implementation of the Volcker 

Rule, the agencies have established an implementation task force. 

One of the Commission’s goals for this task force will be to avoid 

unnecessary compliance and enforcement efforts by the agency. Indeed, this goal is one of necessity for the Commission. Our agency 

remains resource constrained and cannot reasonably be expected to 

effectively police compliance to the fullest extent. 

To be effective, the Commission’s oversight of these registrants 

requires technological tools and staff with expertise to analyze complex financial information. The Commission needs additional funding to deploy a basic nonduplicative oversight regime consistent 

with the rule. The Commission also is analyzing whether it can leverage the use of self-regulatory organizations, such as the National Futures Association, to assist with its responsibilities under 

the Volcker Rule. 

Additionally, I have directed the staff to examine whether new 

authorities are needed for the Commission to appropriately enforce 

the Volcker Rule. Because the rule was authorized under the Bank 

Holding Company Act, the Commission night need additional rulemaking in order to best respond to violations by swap dealers and 

FCMs. I will be glad to keep this committee informed about the results of that analysis. 

Regarding this committee’s stated interest in the Volcker Rule’s 

impact on market liquidity, it is important to note that the final 

rule closely follows the statutory mandate. In other words, the rule 

strikes an appropriate balance in prohibiting banking entities from 

engaging in the types of proprietary trading that Congress contemplated while protecting liquidity and risk management through 

legitimate market-making and hedging activities. 

Before and after the compliance dates for the Volcker Rule take 

effect next year, the Commission will continue its surveillance of 

the derivatives markets and monitor for any liquidity impacts 

brought by this rule or other causes as the swap market structure 

evolves. 

Thank you for inviting me today, and I would be happy to answer any questions. 

16 

[The prepared statement of Acting Chairman Wetjen can be 

found on page 105 of the appendix.] 

Chairman HENSARLING. I thank each of our panelists. 

The Chair now recognizes himself for 5 minutes. 

I want to start out doing something that I rarely do at these 

hearings, and that is to sympathize with the panel of regulators. 

How one goes about trying to reconcile permissible market making 

with impermissible proprietary trading quite easily could be the 

topic of the next ‘‘Mission Impossible’’ movie. So, I get that. But 

you did volunteer for the job. 

Looking at your testimony, Governor Tarullo, you said that 

trades could be either permissible or impermissible depending on 

the intent of the trade or the context and circumstances within 

which the trades are made. While the final rule issued by the agencies articulates standards for making those distinctions, those 

standards will be given meaning as they are applied by banking 

entities and supervisors in the field. Assuming you don’t take issue 

with yourself, do any of the other panelists take issue with Governor Tarullo’s statement? 

If not, I guess here is my question, or perhaps it is more of a 

comment. It seems to me that in many respects we still don’t have 

a final rule, because it really depends upon the discretion of those 

in the field, particularly applying to one’s intent. And I just want 

to say for the benefit of our committee, this isn’t the rule of law, 

and this is one of the reasons that we will continue to have a 

chilling effect, I believe, on many corporate bond markets. 

Now, I know under the statute—and, again, the statute forces 

you to do many things that you may not otherwise feel are logical— 

exemptions are granted from the Volcker Rule, the Treasury Securities agency debt like Fannie and Freddie, and municipal securities as well. So we know that regrettably Detroit has gone belly up, 

and at least the last public proposal that I have seen offers creditors pennies on the dollar of their $11.5 million of unsecured debt. 

I woke up today and saw the headline in The Wall Street Journal, 

‘‘Puerto Rico Debt Cut to Junk Level.’’ 

And so, would anybody on the panel argue that our banks are 

safer and sounder or our financial system is more stable if our 

banks trade and hold Puerto Rican and Detroit debt as opposed to 

General Electric, Southwest Airlines, and Home Depot? And although I haven’t checked the latest ratings, the last I looked, they 

were all AAA or AA. Does anyone wish to posit safety and soundness or greater stability? 

Seeing none, I would ask this question. Under Section 619 of 

Dodd-Frank, we list a number of financial products which are exempt from the proprietary trading ban, but not included in that list 

are explicit exemptions for certain sovereign debt obligations. Now, 

you as a group have chosen to provide that. I assume that is done 

under Section 13, where I read, as long as it would ‘‘promote and 

protect safety and soundness of the banking entity and the financial stability of the United States.’’ 

So Santander Bank, which is a U.S. bank holding company, is a 

wholly owned subsidiary of the Spanish Santander Group. They are 

going to be eligible under your rule. This isn’t what Congress did. 

17 

And by the way, just because Congress makes a mistake, that 

doesn’t mean you have to make one. 

But now the U.S. bank holding company is going to be able to 

trade in Spanish debt currently rated Baa3 by Moody’s, the lowest 

rating before junk status. Also included in your exemption is that 

the same bank can proprietarily trade in the debt of every political 

subdivision of Spain, including Valencia, which I believe is known 

more for its great paella than its great bond offerings. They are 

currently rated B1, which according to Moody’s is junk status and 

‘‘should be judged as being speculative and a high credit risk.’’ 

So how can Santander Bank’s ability to proprietarily trade in 

Spanish debt and the debt of Valencia, Spain, ‘‘promote and protect 

the safety and soundness of Santander Bank and the financial stability of the United States?’’ 

Who would like to answer that? Governor Tarullo, would you like 

to answer the question? 

Mr. TARULLO. Just a couple of clarifying points. One, we do need 

to bear in mind that the prohibitions in the Volcker Rule with respect to trading, remember, are for short-term trading. The Volcker 

Rule does not determine what kind of instruments a depository institution or another affiliate within a bank holding company can or 

cannot hold. 

It was for that reason, by the way, I put in that point about capital at the end of my prepared remarks, because our rules, the 

rules, that is, of the FDIC, the OCC, and the Fed will require capital set-asides for any assets held by the financial institutions, and 

those capital set-asides, of course, are determined with respect to 

the relevant riskiness. 

Chairman HENSARLING. Regrettably, I see my time is way expired, but you are still showing a bias in favor of Spanish debt over 

U.S. companies through your rule. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Mr. Tarullo, on page 2 of your testimony, while still in the first 

paragraph, you said, also, of course, the London Whale episode allowed staff to test procedural and substantive requirements of the 

proposed rule against a real world example of what should not happen in banking organizations. 

The JPMorgan London Whale trade is a textbook example of how 

a hedge can actually be a proprietary trade. In the course of just 

a few months, JPMorgan lost more than $6 billion through complicated swaps transactions. 

Is it correct that the Volcker Rule would prevent these so-called 

hedges in the future? Would you explain how the Volcker Rule attempts to prevent the next London Whale? 

Mr. TARULLO. Congresswoman Waters, I think there are two 

ways in which the rule would be responsive to what we saw transpire in the London Whale episode. 

The first is procedural; that is to say that one of the things that 

has been reported about the London Whale episode is that the risk 

management lines of authority and the relative amount of risk assessment and documentation of risk that were done were not in accord with what the Volcker Rule would require. 

18 

Essentially, the Volcker Rule says if you have something which 

is supposed to be a hedge, you have to document that it is a hedge, 

and that documentation not only provides the regulators with the 

opportunity to oversee the implementation of the rule, it allows the 

risk management officials of the financial institution itself to have 

a better handle on the various trades that are taking place 

throughout the organization. 

So in that respect, I think there is a substantial confluence of interest of the regulators and the ultimately responsible risk managers of a firm. 

The second is the substance of the situation, where anything can 

be characterized as a hedge if you work hard enough at it. And 

what the rule is intended to do, and I think with the kinds of 

changes that some of my colleagues describe does a better job of 

doing than maybe the proposed rule did, is to make sure that 

trades that are supposed to be hedges on existing positions do not 

take on more risk that previously didn’t exist. And that, in fact, of 

course is what happened with many of the trades involved in the 

London Whale. 

So the short answer is, on both procedural and substantive 

grounds, it would be responsive to that episode. 

Ms. WATERS. Thank you very much. 

Mr. Gruenberg, compliance with the Volcker Rule will largely be 

judged by a bank’s compliance with their own internal policies and 

procedures, which they will be permitted to devise. Yet we know 

from past experience that banks have sometimes not complied with 

their own internal policies. Just look at examples of money laundering, and robo signing of foreclosure documents. 

How can Congress ensure that the rule is being faithfully implemented by your agencies and banks, and that banks are being held 

to compliance with their own policies and procedures? 

Mr. GRUENBERG. Congresswoman, I think compliance and enforcement of compliance in many ways is the central issue relating 

to implementation of the Volcker Rule. The Volcker Rule establishes some prohibitions, but the real key to it is going to be oversight, supervision, and enforcement of the compliance requirements. 

And as we know, the activities prohibited by Volcker are largely 

concentrated in the largest financial institutions, which is why the 

compliance requirements of the rule are very much focused on the 

larger institutions. And for those larger institutions, they will have 

detailed reporting and recordkeeping and a set of other requirements, including metrics reporting for their activities, so we will be 

able to monitor the operations of the companies across-the-board. 

But all of that is ultimately going to depend on vigorous oversight and supervision by the agencies as well. And I think that is 

why we have made a point of establishing this working group, and 

I think—and you can ask each of the people at the table here—the 

commitment to effective enforcement is really going to be the key 

to implementation here. 

Ms. WATERS. Mr. Curry, once the Volcker Rule has been implemented and operational for 7 years, what demonstrable factors 

should Congress be able to look at in order to see that the rule is 

working as intended? 

19 

Mr. CURRY. I think we will find from our oversight and regular 

examination and supervision of the institutions whether in fact 

they have complied in terms of the compliance procedures they are 

monitoring and the effectiveness of their metrics that are required 

under the rule itself. We will also be taking advantage of the conformance period to test both the institution’s procedures and our 

own internal examination procedures as we proceed with the rule. 

Ms. WATERS. Thank you. I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, Chairman Garrett, for 5 minutes. 

Mr. GARRETT. Sure. Thanks, Mr. Chairman. 

Chairman Gruenberg, good morning. 

So following up along the lines of the chairman here, as he has 

indicated, the Volcker preamble states that regulators have the 

ability to use safety and soundness authority to exempt certain foreign and sovereign debt. As he pointed out, there is certain debt, 

such as Greece and Spain, that is extremely risky, and about which 

we should be highly concerned. And one can make the case that by 

doing so, you are actually making some of these institutions less 

safe and less sound by allowing them to do this. 

On the other hand, when it comes to addressing the problems in 

the CLO market, the preamble also states that you could have used 

your safety and soundness authority to address the concerns that 

have been raised here, and if you don’t, then banks will be forced 

to fire-sale some of their legacy CLO holdings. This could drive 

down the prices, it could hurt the markets, and it could hurt those 

banks and make them less safe and sound than they are right now. 

And this is not a hypothetical that I am saying here. I have with 

me a letter from the First Federal Savings Bank of Elizabethtown, 

Kentucky. They are a small bank, $850 million in assets, so they 

are not the real target of the Volcker Rule. The letter states that 

they are still recovering from the financial crisis, they have new 

management, and they finally got some income, around $3 million. 

However, the letter goes on to say, and this is important: ‘‘The 

application of the final rules could result in the severe erosion of 

our already thin tangible common equity that was so severely depleted during the credit crisis. It is hard to understand, as a management team that was able to take a financial institution through 

the darkest days of the financial crisis, why we should be presented 

with another existential threat based solely on an arbitrary and expansive interpretation of the final rule.’’ 

So why are you using the safety and soundness argument on the 

one hand to allow for Greek and Spanish debt, but in a case like 

here, a good little bank that is trying to come out from under 

water, you are now imposing an existential threat on them and potentially putting them out of business? And this was, of course, not 

the intention of Congress. 

Mr. GRUENBERG. Congressman, I did receive the letter. We received the letter, I think all of the agencies did, from the institution. 

Mr. GARRETT. Sure. 

Mr. GRUENBERG. So I am familiar with it, but since it obviously 

affects an individual company, I won’t respond to that specifically. 

Mr. GARRETT. Sure. 

20 

Mr. GRUENBERG. But if I may just speak more generally, the 

issue of CLOs, collateralized loan obligations, has been raised, particularly since the final rule was issued. It is certainly an issue, 

fair to say, it is fair to say, that the agencies now will have the 

opportunity to review and consider. 

I guess I would just make a couple of points, if I may. 

Mr. GARRETT. So if you can get back to me on how and when you 

think you can actually fix this, because obviously for these small 

banks right now, they can’t wait the normal course of time which 

it took this body to come up with this rule. I don’t know for this 

particular bank, but other banks in a couple of years could, while 

your working group works your way through it, be out of business 

and the people in that town could have one less bank. 

A working group has been established. I guess I would put this 

question to everyone on the panel. One of the things that I was 

looking for, which was not done, was a cost-benefit analysis, correct? And that is despite the fact it was pointed out to us that 

there was a law in place, the Riegle Community Development and 

Regulatory Improvement Act back in 1994, that requires Federal 

agencies including the Fed and the FDIC, when they are coming 

up with a new rule, to basically—and I won’t read the whole thing 

here; I don’t have that much time—assess the cost on institutions 

and also the benefits. 

So since that is the law in place, why was it that no one did a 

cost-benefit analysis? 

Mr. TARULLO. I wouldn’t say, Congressman, that there was no 

cost-benefit analysis. I think what you actually saw— 

Mr. GARRETT. I have not seen anyone who has said that there 

is. You say there is a cost-benefit analysis? Can you provide it to 

the committee? 

Mr. TARULLO. First off, we should start by remembering that the 

basic policy decision was made by the Congress. That is, the Congress decided that proprietary trading— 

Mr. GARRETT. Now, look. I only have 46 seconds. A cost-benefit 

analysis was not done, and it was a requirement. I would like an 

explanation in writing from each one of you on the panel as to why 

you did not comply with that. 

Also, I would like a commitment, since you have a working group 

here and you have indicated that you will be going forward, maybe 

I will just run down the row in the last 20 seconds, will each of 

you commit, going forward through the working group, to develop 

an agreed-upon set of basis or metrics to determine the rule’s impact on the ability of businesses to borrow in the corporate bond 

market, and also through this working group to continuously monitor those metrics and the impact of those rules, and then to also 

report back to us on a quarterly basis on your findings? That way, 

we would actually have specifics and timeframes. 

Let’s run down. I will start on the left. 

Governor Tarullo? 

Mr. TARULLO. Congressman, I am not sure that sitting here—I 

want to consult with our colleagues to see what kind of process we 

are going to follow. We are surely going to follow a process of trying 

to deal with interpretive difficulties. I do beg to differ a bit. I 

think— 

21 

Chairman HENSARLING. We need rapid answers. The time of the 

gentleman has expired. Rapid answers, please. 

Ms. WHITE. I will say that I think that the working group is 

enormously important to look for and analyze unintended consequences and respond to them, which is the purpose of it. It is 

very actively engaged now, including considering what you mentioned— 

Mr. GARRETT. Can you all commit to the timeframe and everything else that I laid out there, Mr. Chairman, from them? Maybe 

you can just ask them to run down, yes or no, make the commitment. 

Mr. CURRY. We will also be looking at the, during the performance period, the impact of the metrics and other procedures that 

we are developing. 

Chairman HENSARLING. Quickly, the last two gentlemen. 

Mr. GRUENBERG. Yes. We will do the same as Comptroller Curry 

indicated. 

Mr. WETJEN. As will the CFTC. 

Mr. TARULLO. Mr. Chairman, could I just take 10 seconds for 

Congressman Garrett to say, whatever it is, whatever processes we 

do decide, we surely will report them back to you and try to give 

you a sense of how this oversight and implementation is taking 

place, which will then in turn allow you to ask more questions 

about it. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, the 

ranking member of our Capital Markets Subcommittee, Mrs. Maloney, for 5 minutes. 

Mrs. MALONEY. I thank the chairman for yielding. 

The idea behind the Volcker Rule is a simple one: Banks that receive Federal deposit insurance should be serving their customers 

and not making risky bets for their own account. It took nearly 4 

years for this simple idea to be translated into a final rule, and the 

majority of the work was done by the five regulators before us 

today, and I would simply like to say thank you. 

I would also like to point out that most of the banks across this 

country have already accepted the Volcker Rule. I did a survey of 

the banks that I am privileged to represent, and every single one 

of them is treating it like the law of the land. Every single one has 

spun off their proprietary trading desks. 

So the Volcker Rule, I would say, is here to stay. Instead of rehashing the same old debates, I believe we should be focused on 

getting the implementation right and making sure that the rule is 

tough but workable. 

So with that in mind, I would like to ask Governor Tarullo, I understand that the CLO industry has proposed a fix that some in 

the regulatory community may consider too broad, and I agree that 

we should be very careful about amending the Volcker Rule, because we don’t want to blow up a huge hole in the rule. But I 

would like to ask you, do you think that there is some narrower 

fix that would solve their challenge, their problem, while also protecting the Volcker Rule? 

Mr. TARULLO. Congresswoman Maloney, that, I think, is the 

question that we will have to address. And in fact, I think someone 

22 

already alluded to the fact that this issue was already at the top 

of the list of the group to think about. You have quite properly 

identified the challenge, which is to see whether there is a way to 

respond where, legitimately, the interests implicated by the 

Volcker Rule are not at issue without opening up a broader hole 

that does implicate those issues. 

I would just note in passing that an approach to this already appears to be in train among some market actors, which is to say, 

making sure that the CLOs, new CLOs which they are issuing do 

not contain other securities that cause the position to become a covered fund. Now, that doesn’t deal with the legacy issue, and that 

is the one we will be addressing. But going forward, at least, there 

is a way which I think the industry itself has already identified. 

Mrs. MALONEY. And how, Governor—or anyone else on the 

panel—are the agencies planning to share the trading data that 

they are going to collect to monitor compliance with the Volcker 

Rule? Will there be a centralized location for the trading data, such 

as the Office of Financial Research, or will each regulator examine 

the data that it collects separately? 

Ms. WHITE. Maybe I could respond to that initially. Again, the 

working group for implementation has already begun to discuss 

that, and the feasibility of having a common site for the data, but 

the discussions are ongoing as we speak. 

Mrs. MALONEY. Okay. You mentioned in your testimony earlier 

that the working group is clarifying different parts of the Volcker 

Rule now. But do you know yet how they are going to coordinate 

enforcement of the Volcker Rule? What if one agency thinks that 

a trade violates the Volcker Rule, but another agency thinks that 

it is acceptable? How are you going to solve that? Are you working 

on a memorandum of understanding on enforcement? But what 

happens if two regulators disagree on an action? 

Ms. WHITE. Again, I think the consistency and enforcement is 

also very much under discussion by all the agencies, including in 

this working group. Each of the agencies would have the power to 

require divestiture or a bank to stop engaging in proprietary trading. Issues could be discovered upon exam by any of the agencies 

and discussed and coordinated among the agencies before a decision is made as to what to do enforcement-wise. 

Mrs. MALONEY. What happens when there is a legitimate disagreement between them? 

Ms. WHITE. The goal is obviously consistency, but there is a 

mechanism to discuss that, toward that objective. 

Mr. TARULLO. I would just add, Congresswoman, that in the 

bank regulatory area, the issue of an activity that affects different 

parts of a bank holding company arises quite frequently, and in 

fact the three banking agencies have a very well-established set of 

mechanisms for consulting. And I have to say it has struck me in 

my 5 years at the Fed that rarely does disagreement on that 

among staff come to my level. They are usually able to work it out. 

And I don’t see any reason why that wouldn’t be the case with the 

Volcker Rule as well. 

Mrs. MALONEY. Thank you. My time has expired. 

23 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, Mrs. Capito, the Chair of our Financial Institutions Subcommittee, for 5 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I want to go to the issue that I talked about in my opening statement, which was the issue of the CDOs and the TruPS and how 

that ended up in the final rule, when the proposed rule did not 

really go into this area, and therefore, there was no comment period to see this unintended consequence. 

So if somebody could give me some clarity, why did you choose 

to put this into the final rule without allowing those most deeply 

affected, most particularly community banks, to have the opportunity to bring to light to you all and to others that this was going 

to have some negative impacts? Who wants to answer that? 

Mr. TARULLO. I can start, Congresswoman Capito. 

As I think you know, the issue with the TruPS arose from a confluence of several factors. One, of course, was the rule itself, and 

I think people understood that there was contemplation of divestiture, and that is why there was a conformance period created just 

exactly to avoid fire sales. 

The second, and here is where I think a lot of people probably 

didn’t focus on it both outside and inside the regulatory agencies, 

was the combination of the fact that accounting rules require that 

where the instruments in question had lost value in the market, 

that there was essentially a bringing forward of the mark-to-market adjustment because of the fact that those instruments were declining in value. And that is, I think, the interaction that wasn’t 

contemplated, and that was why in particular we all felt that a 

quick response was required. 

I think with a lot of the other instruments that people have 

talked about, as I indicated to Congresswoman Maloney, we will be 

going through those, but in many, if not most instances, a lot of 

the instruments in question are actually at or above the values 

where they were issued into the market, and so the accounting 

rules are not forcing the decision and the write-downs immediately. 

Mrs. CAPITO. Okay. Let me ask a question, then, of Chair White. 

Your agency oversees the Financial Accounting Standards Board 

(FASB). Is this something that came into your bailiwick as we were 

creating this new part of the rule moving into December, as we 

have heard? 

Ms. WHITE. I think I would have two responses to that. One, I 

think in the proposing release, at least broadly, questions were 

asked around covered funds, what is included and whatnot, and 

there weren’t specific comments that came back in on that issue. 

I think one of the things that we were focusing on when the issue 

did gel is to make certain that everyone understood what the accounting rules were for a subsequent event should the agencies 

then act as they ultimately did act. So, that is an issue. It is not 

new accounting, but it is something that we responded to as soon 

as it was obviously an issue. 

Mrs. CAPITO. Right. I think the troubling thing from my aspect 

is—and I mentioned this also—that the options, because of the 

tight timeframes, were really a lawsuit that I think the ABA put 

forth to try to stop this. And also, many of us, Republicans and 

24 

Democrats, were being approached quickly during the Christmas 

season on how we are going to address this issue. And so while I 

say thank you for making those adjustments in January, it certainly would have been easier probably for everybody if it was 

avoided on the front end. 

The last comment I will make, and this goes to what Mrs. Maloney was talking about, is that I am sitting here listening and I 

must have heard at least 40 times ‘‘interagency group.’’ We have 

all been on committees before, and when you get into an interagency group or you get into a committee, we all look at each other 

and say, okay, who is going to decide here? Who is in charge? I 

have yet to hear really who is in charge. 

I know you work across agencies and everything, but I can see 

a scenario that could be a negative scenario such as, who is in 

charge? Nobody is in charge, so nobody makes a decision. Or you 

make a decision over one another and then all of a sudden there 

are three or four different decisions that have been made, and how 

are the institutions supposed to react in the best interests of their 

clients? 

So if anybody has a comment on that, I know it is a work in 

progress, but I am deeply concerned about that. 

Mr. TARULLO. There is a legitimate concern, as you all well 

know, whenever you have multiple actors having to agree on a single course of action. I think that, as I was alluding to earlier, this 

is actually the normal state of affairs for the three banking agencies, and the need to coordinate, which sometimes is in the face of 

some disagreements that then sometimes do hold things up and 

they have to go up for decision in that case. 

I would just say it is the other side of wanting multiple voices 

involved in any regulatory effort, which was clearly Congress’ intent with respect to the Volcker Rule. 

Mrs. CAPITO. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman Gruenberg, I would like to talk to you about the 

TruPS CDOs. As you heard, the final rule provided the financial 

industry with many exemptions, including new guidance on TruPS 

CDOs, which have community bankers very concerned. However, 

some in the industry are now asking for more lenient treatment regarding CLOs. 

Can you explain what risk nonexempt or arbitrage CLOs pose? 

And I would just like to ask you if it is wise at this point to make 

another exemption, given the fact that only 100 community banks 

out of 6,000 have CLOs? 

Mr. GRUENBERG. As has been indicated, that is the issue we are 

going to have to consider. I think the things to think about are, 

one, in regard to the CLOs, if a CLO is made up exclusively of 

loans, and that would apply to a substantial number of them, they 

would not be considered a covered fund and therefore would not be 

subject to the Volcker Rule requirement. 

For the others, that is really what we need to sort through, and 

the industry refers to those as arbitrage CLOs, and they have, in 

25 

addition to loans, other kinds of impermissible assets in the CLO. 

In many cases there are just a small number of assets, so they can 

be easily disposed of and, in a sense, the CLO can be cured from 

the standpoint of Volcker compliance. In other cases, the other assets may be a substantial portion of the CLO and create a greater 

challenge. 

I think what the agency has to consider is what, if any, change 

in treatment should be provided for them, and that is, I think, 

what we will need to focus on. 

Ms. VELAZQUEZ. So how would regulators have treated the underlying loans in arbitrage CLOs if banks had originated them and 

held them on their books? 

Mr. GRUENBERG. You are talking about loans that are by definition leveraged loans that carry risk with them, if that is the underlying questions that you are raising. 

Ms. VELAZQUEZ. Mr. Chairman, again, industry participants have 

stated a fire sale of CLOs could cost them 90 cents on the dollar. 

I just would like to ask you if you know how they came up with 

this figure? 

Mr. GRUENBERG. I couldn’t say offhand where that came from. 

Ms. VELAZQUEZ. What did regulators do in the rule to prevent 

such a fire sale? 

Mr. GRUENBERG. I think that is part of sorting through the issue, 

Congresswoman, both to examine the merits of the issue and any 

potential consequences of a response. 

Ms. VELAZQUEZ. Chair White, foreign markets have yet to implement regulations similar to the Volcker Rule. What is the likelihood that large U.S. banks will simply move their proprietary trading overseas? 

Ms. WHITE. Obviously, the competitive effects of the Volcker Rule 

as enacted in the statute are not new to us. It is certainly one that 

we also attended to with respect to the rule itself. I would note that 

in Europe, the United Kingdom, France, and Germany, they are 

moving toward doing some kind of rules in this space, but they 

have yet to sort of land on and actually adopt those. So there is 

more to be said about that. Obviously, what you don’t want is the 

regulatory arbitrage, you don’t want the anticompetitive effects on 

the U.S. entities, but the statute also requires what it requires. 

Ms. VELAZQUEZ. So is there anything in the Volcker Rule that 

addresses the threat to the U.S. financial system by overseas proprietary trading? 

Ms. WHITE. I think that was one of the changes I actually alluded to in my oral testimony with respect to proprietary trading 

of foreign banking entities, whether it was going to be anything 

solely out of the United States and was going to be completely out 

from under the Volcker Rule. We might have lost liquidity then, 

there might have been anticompetitive effects that occurred then, 

and so we refined the rule in light of those concerns. 

Ms. VELAZQUEZ. Thank you. 

Comptroller Curry, a recent OCC survey of financial executives 

indicates a greater willingness to lend to businesses and consumers. Is it possible that the Volcker Rule could further boost 

small business lending as banks seek out revenue in traditional fiVerDate Nov 24 2008 17:06 Sep 19, 2014 Jkt 088524 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\88524.TXT TERRI
26 

nancial products due to the general prohibition on risky and lucrative proprietary trading? 

Mr. CURRY. We see that as a very positive sign that banks are 

increasing their willingness to lend, and hopefully that will translate into some economic benefit as well. 

Ms. VELAZQUEZ. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, the Chair of our Housing and Insurance Subcommittee, for 

5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I think this has been alluded to, 18,000 comments to a rule that 

was originally put out that a lot of people felt like was pretty vague 

when it was put out, and I think that is one of the reasons you received 18,000 comments on it. But we were, I think, many of us 

a little surprised it wasn’t reproposed after the fact that there was 

so much interest in that. There was really not any chance then to 

review the changes, and there was no economic analysis involved 

and really no provisions to coordinate enforcement, examinations, 

and interpretations. I would think, and hopefully the panel agrees, 

that is probably not an ideal situation. 

But that being said, what procedures have been established to 

ensure that all of the impacted entities receive consistent and timely answers to interpretive questions that I am sure, as I am told, 

there are a lot of those coming in. I will just start with the panel, 

and who would like to tell us what you are doing? 

Mr. CURRY. I would just emphasize what other panelists have 

said earlier, Congressman, that this is really going to be one of the 

major frameworks that we have to establish for our working group. 

I think the goal is to make sure that we have consistent interpretation. The working group, which will be composed of subject matter 

experts, will be the starting point for those discussions and ultimately the principals of the agency will make that call. 

Mr. NEUGEBAUER. Ms. White? 

Ms. WHITE. I really don’t have much to add, so I don’t want to 

take your time on that. I think we were all focused on, it is actually 

reflected in the adopting release, too, the importance of consistency 

as we proceed further, and responsiveness, and that we need to be 

very actively engaged, as that is the purpose of the working group. 

It is also the purpose of the commitment of all five agencies to do 

that. 

Mr. NEUGEBAUER. Obviously, these interpretations are going to 

be a very important piece of the regulation, and so the question is, 

one, you are saying that this working group is going to coordinate 

that between the five of you. But the other question is, how will 

we disseminate it? Will that be a public process? In other words, 

once that finding is determined, and that interpretation is done, 

will those interpretations be made available for comment? 

Mr. TARULLO. That probably depends. My suspicion is, Congressman, without knowing now, that there will be some issues that 

arise that are susceptible to more or less generally applicable guidance, and that in that instance the same kind of processes that we 

follow in other supervisory areas, where you elaborate what you 

have been able to conclude and you send it out to supervisors and 

27 

examiners and it is available to the firms, that would be the appropriate path to follow. 

There will probably be other instances, and I think in particular 

in terms of market-making decisions on whether for a particular 

kind of instrument the particular approach that a firm is taking is 

in fact legitimate market-making, where it might actually involve 

some proprietary information from the firm. It will be a very sort 

of firm-specific interpretation that, for example, the SEC may say 

to the rest of the group, this is what we are facing, this is where 

we are inclined, does everybody agree? And there may be a general 

agreement on that. But then you wouldn’t want to publish that, because you don’t want to publish the business strategy of a particular firm. 

So I think it probably varies depending on the general applicability and sort of nonfirm-information-revealing quality of the decisions. 

Mr. NEUGEBAUER. And if that decision is challenged, for example, 

then does that challenge go back to the working group or does it 

go back to the individual entity? Then, how is that reconciled? 

Mr. TARULLO. Again, I am drawing here on our bank supervisory 

experience where—and I would expect you will have something 

similar to this in the Volcker Rule area—in the first instance there 

tends to be a dialogue with the immediate supervisors, and all of 

these big institutions that have to report the metrics have onsite 

teams of supervisors from some combination of the Fed, the FDIC, 

and the OCC. And then, of course, the SEC has a regular relationship with the big broker-dealers. 

So that will be in the first instance. But as always happens when 

there is a disagreement or an objection or a desire to have the 

issue taken up in Washington at the particular agency, then that 

happens. And as I say, the norm is that these sort of things are 

actually worked out pretty effectively. It is one of the advantages 

of the supervisory process. There are exceptions, and that is when 

things get bumped up the line. 

Mr. NEUGEBAUER. One quick question: If there is a difference of 

opinion in the working group, is there somebody, an individual 

agency who has the final word if the working group doesn’t find 

a— 

Mr. CURRY. It would be kicked up to the principals. We would 

be deciding any issue that the agencies couldn’t resolve at the 

working group level. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New York, Mr. 

Meeks, for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Let me start with the Governor. 

Governor, I just want to follow up, I guess, on questions I heard 

Mrs. Capito ask, because everyone wants to know what the rules 

are and to have some certainty. But with the various regulating 

bodies, there could be some conflicting interpretations, making it 

confusing for many banks to determine which agency has the final 

say on what. 

Now that the rules have been adopted, would it make any sense 

for one regulator to take the lead in the interpretive guidance or 

28 

at a minimum to have a process that ensures identical guidance is 

issued from all regulators? 

Mr. TARULLO. Congressman, I don’t want to speak for the four 

colleagues to my left—but I think probably everybody would say 

that we all have a statutory mandate from the Congress for the 

oversight of the particular entities that we have, and under those 

circumstances you wouldn’t formally cede an interpretive authority, 

because ultimately we, for example, would be responsible for the 

Volcker Rule at the State member banks, Mary Jo at the brokerdealers, and Tom at the national banks. 

But again, having said that, I think part of the reason why people are asking questions about how this works is precisely because 

it generally works so well—again, at least among the banking 

agencies, but we have more and more contacts with the market 

regulators—of working things through. 

And, just to remind everybody of something that was in Chair 

White’s opening remarks, that the decision of the market regulators and of the banking regulators was not to go with our own 

rules, even though, as you know, the Volcker Rule is really a number of separate rules—the banking agencies, the broker-dealers, the 

commodities dealers. But instead, everybody understood the importance of getting consistency in the regulation, notwithstanding the 

substantial additional time it took to get there. And I would say 

that commitment to getting a consistent regulatory framework will 

naturally extend to a commitment to getting a consistent interpretive framework. 

Mr. MEEKS. Let me stay with you, Governor, because it has also 

been argued that prohibiting proprietary trading will hurt our 

banks as they compete overseas. The European Commission recently recommended a version of the Volcker Rule for its largest 

banks and the U.K. government has adopted a similar proposal 

that pushes risky trades into a separately capitalized ring-fenced 

entity. And my question to you is, how relevant are competitiveness concerns in the current environment? 

Mr. TARULLO. The tendencies you described have been very interesting to me. When the Volcker Rule was first passed by the Congress as part of Dodd-Frank back in 2010, I would say the immediate reaction that I got in talking to counterparts in other major 

financial jurisdictions was something along the lines of, it will be 

interesting to watch how you all do this; we are not likely to do 

anything. And yet in the intervening years, as you have just mentioned, more and more of the key jurisdictions have actually started to walk down that path to thinking about some combination of 

ring fencing, banning of proprietary trading. 

And I think that is based on experience, Congressman. I think 

people have had experiences with their own firms, I do think that 

the London Whale episode resonated around the world and not just 

within the United States. So although we don’t know, as Chair 

White said, where this is going to end up, it is pretty notable that 

the trend in proposals has been to come closer to something that 

looks more like the Volcker Rule. And I will be honest with the 

committee, I would not have predicted that 3 years ago. 

Mr. MEEKS. Thank you. 

29 

Chair White, let me ask you this question. I understand that 

some industry stakeholders have expressed concerns regarding 

whether banks would have to divest of certain senior debt securities of CLOs because those securities contain the right to remove 

a manager for cause. Currently, the Volcker Rule only permits debt 

security holders to have the right to remove the manager in the 

event of a default or an acceleration event. Are your agencies considering whether these voting rights with regard to the CLO manager constitute an equity interest versus a creditor-protective 

right? 

Ms. WHITE. That is precisely one of the issues that, again, the 

working group is discussing in connection with CLOs. The issue is 

obviously what is an ownership interest, and it is defined by the 

rule with certain factors, including the one you note. So that is an 

issue that has been teed up for the group and they are actively discussing it. 

Mr. MEEKS. I can’t do another question in 4 seconds. 

Chairman HENSARLING. No, the gentleman can’t. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I would like to address my first question to Mr. Gruenberg. One 

of the concerns that I have is during the crisis there was this activity that went on which put a lot of the investment banks into the 

big banks and allowed Lehman Brothers, for instance, to fail. But 

when you put the Bear Stearns of the world in some of these other 

banks, I think you made them bigger, I think you made the institution more risky, in my judgment anyway. 

And one of the concerns I have is when you do this, suddenly 

now you put this more risky activity into an institution that is insured by you and your agency, and you put those deposits, I believe, more at risk. So over the last 5 years, I think some of them 

now are starting to spin off their proprietary activity, their trading 

activity, their investment banking activity. And I just wanted you 

to comment on that and how much of it has gone on, how much 

does it still need to do, and just your perspective. 

Mr. GRUENBERG. I think that is an important question, Congressman. I think it is fair to say that the way we dealt during the crisis 

with some of the troubled institutions was to facilitate acquisitions 

by other institutions and consolidate them into bank holding companies. And I think the combination of those activities and the increased scale of the activities raised significant questions for regulation and supervision. 

I think it is one of the reasons we are so focused on the capital 

and liquidity rules that particularly apply to these large systemic 

companies, because of the risks they pose and the need to, frankly, 

impose higher prudential requirements on those large complex institutions that pose the greatest risk to the system and are, I 

think, differentiable from a lot of the other institutions in the system. So I think it is one of the significant challenges for prudential 

standards and for supervision going forward. 

Mr. LUETKEMEYER. One of the concerns I have, obviously, is if it 

is an FDIC-insured institution, obviously that impacts the FDI insurance fund, so there is some risk there for that. 

30 

But I am curious, how many banks that you are aware of just 

off the top of your head, rough figure, have divested themselves of 

these types of activities or put them into a subsidiary of some kind 

so they now no longer have the main institution, the retail portion 

of their business, that would be impacted by this activity? 

Mr. GRUENBERG. I don’t have those numbers available. I will be 

glad to check on that and get back to you. 

Mr. LUETKEMEYER. Okay. Are there a lot of them that still have 

those activities in the bank, then? 

Mr. GRUENBERG. I think most, but I want to check on the facts 

here. For those that have separate proprietary trading desks, I 

think as a result of the Volcker Rule, a lot of those have been taken 

out. 

Mr. LUETKEMEYER. Right. 

Mr. GRUENBERG. But I would want to really check on the facts 

for that. 

Mr. LUETKEMEYER. I am not a big fan of the rule, but that seems 

to be one of the positives there, that they are starting to segregate 

themselves and set up these separate entities, which in my mind 

certainly protects the depository institutions a little bit better. 

Mr. Wetjen, you have been able to escape most of the questions 

here today, so I want to grab one for you. One of the things that 

happens, in my world anyway, is that a lot of folks I deal with 

begin the commodity process with their contract, when they take 

it out, is the first one and then it gets traded a dozen times after 

that. Have you seen with the Volcker Rule a chilling effect on folks 

being able to take out initial contracts for commodities? 

Mr. WETJEN. Congressman, I have not. 

Mr. LUETKEMEYER. Have you seen a cost increase to those individuals or companies that take out the initial contracts to hedge 

their commodity, whatever it is, whether it is corn and beans or energy or whatever? 

Mr. WETJEN. I have not been aware of any such change as a result of the Volcker Rule. As I had mentioned in my oral statement, 

there have been a variety of reforms that our agency has put into 

place, and so consequently the market structure, in particularly for 

swaps, has changed, so there has been some attendant cost to the 

market structure changes in the swaps markets as a result of our 

reforms. I don’t have any specific data on what the numbers would 

be, but I am not aware of anything specific in relation to Volcker. 

Mr. LUETKEMEYER. The other members of the panel this morning, very quickly, I have less than 30 seconds left here, have you 

seen an increase in the cost of doing business as a result of the 

Volcker Rule at this point yet? 

Mr. TARULLO. No, sir. 

Mr. LUETKEMEYER. No? 

Mr. TARULLO. No. But just to be fair, I think a lot of people are 

waiting for the final rule to come out before they start making— 

Mr. LUETKEMEYER. The anticipation of the final rule here hasn’t 

caused— 

Mr. TARULLO. There it is basically, what you mentioned, the prop 

trading has been divested. 

Mr. LUETKEMEYER. Okay. 

Ms. White? 

31 

Ms. WHITE. I haven’t seen the increase in cost, but clearly there 

are costs. 

Mr. LUETKEMEYER. Okay. 

Mr. Curry? 

Mr. CURRY. I would agree. And that is something we will be looking at during the conformance period. 

Mr. LUETKEMEYER. Okay. 

Mr. Gruenberg? Okay. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. And thank you for 

having two members of the panel whose accents that I can understand. Actually, they don’t have accents; all the rest of you have 

accents. 

Gentlemen, first of all, thank you for being here, and thank for 

your testimony. It is always amazing to me that in today’s world, 

from what I see, is the most complex financial services industry in 

the history of mankind, not just in America, but across the world. 

We are in a globalized economy, we are all struggling to figure out 

what is going on, what is going to happen tomorrow. And I checked 

out all of your backgrounds. You are the smartest people in the 

world, you have the best education you can have, and I know you 

are struggling with it as well. 

Yet this morning, on the basis of one rule that we instituted with 

the intent of trying to limit some of the most risky, most complicated activity the financial services people were playing with, 

that many people think played a significant role in the collapse of 

2008, we passed a law that said, please help us, not kill it, but to 

limit it, put it in perspective, yet this morning from what I have 

heard so far, and we are not even halfway through the hearing, the 

rule could be the cause of the next economic collapse, it is arbitrary, it is expansive, it is an existential threat to the economy, and 

worst of all, apparently you all pass rules and regulations and then 

don’t give a damn what the impact will be. 

I think that each of you should be prepared, not from me, but 

at some point during this hearing, someone may as well just ask 

you, why do you hate America? 

I find this to be ridiculous. It is a complicated rule, of which, as 

we move forward, I have had some communications with some of 

you, I am currently in discussions with some of my constituents 

who have some issues with some of the details, community banks 

being one of them. My hope and expectation is that you will work 

with us as best you can to address these issues as they go forward, 

as we find them to be real. 

I hope that each of you see that your role as a regulator is not 

just to regulate. I hope and presume that you see as part of your 

role a responsibility to inform us when you think we are wrong or 

when you think we have made a mistake. 

So I would like to ask each of you, if you could, if I made you 

emperor of the world, would you repeal Section 618, 619, yes or no? 

Simple item. 

Mr. Tarullo, would you repeal it? 

32 

Mr. TARULLO. No, sir. And I think, as many people have observed, the London Whale showed why. 

Mr. CAPUANO. Ms. White? 

Ms. WHITE. I would not. And I would just like to add that I think 

all of the regulators very carefully focused in the rulemaking on 

the market impacts, economic impacts, and responded to them and 

will continue to do so. 

Mr. CAPUANO. I have always believed that. Even when there 

were regulators that I didn’t agree with, I have always thought 

that regulators, like most Members of Congress, are good people 

trying to make the world a better place. 

Mr. Curry, would you repeal it? 

Mr. CURRY. I would agree with Governor Tarullo for the same 

reasons. JPMorgan is a national bank. We supervise it. That was 

an eye opener. 

Mr. CAPUANO. Mr. Gruenberg, would you repeal it? 

Mr. GRUENBERG. No. 

Mr. CAPUANO. Mr. Wetjen, would you repeal it? 

Mr. WETJEN. No, I would not. 

Mr. CAPUANO. As we go forward, I would like to ask a few questions. First of all, I do think that there is a problem having so 

many regulatory bodies participating in one rule. That is why I 

have always been in favor of trying to consolidate. Not that I don’t 

like each of you individually, but I do think that it is ridiculous 

that we have so many regulators doing the same thing. Consolidation, to me, we have had this debate a long time, I hope we actually make some progress at some point, and each of you will be 

winners, don’t worry, we will figure out how. I don’t know how. 

That is a different issue. I hope that as you go forward, I would 

strongly—I think it is part of your responsibility, I shouldn’t even 

have to ask, but I am going to do it for the record—as you find 

things that you think that we should amend, let us know, because 

I agree, I don’t want it repealed. I am more than open to amending 

it if you think that somehow we missed a comma or we have to 

tweak it or you think that you are constrained from doing what you 

think is right. I think that is a perfectly appropriate thing for you 

to tell us, even if there are disagreements amongst you, and I certainly hope that you will. 

This is a complicated area. You are on new ground. I don’t expect 

you to get it 100 percent right the first time. I know you are trying. 

That is why it has taken so long. Some people wanted you to rush 

it and get it done, which I think would have been a recipe for absolute disaster. You took your time. You are trying to do it right. 

As you move forward, hopefully you will work with us to try to 

amend things that maybe you didn’t see. I know you will be looking 

at the impacts of all the rules that you have. And I look forward 

to working with you as we move forward to get it right, to maintain 

the American financial services industry as the leading in the 

world, as we are today and we will be tomorrow. And I know that 

is what you want as well as what we want. Thank you all very 

much. 

Chairman HENSARLING. The time of the gentleman has expired. 

33 

The Chair now recognizes the gentleman from California, Mr. 

Royce, the Chair of the House Foreign Affairs Committee, for 5 

minutes. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

During last month’s hearing on the Volcker Rule, I questioned 

our panel on the need for coordination of examination and supervision and enforcement between the five agencies that are represented here today, along with the National Futures Association 

and FINRA. And I don’t think their answers would surprise you, 

and I think you have heard more of that here today, some of those 

quotes. 

The rule in no way states how the regulators are going to coordinate. In fact, it acknowledges that there is not a method or protocol 

for doing that, and acknowledges that there is overlap in jurisdiction. So I think it is very lacking in that respect. That is one observation we heard. Another is, we don’t think you can have five 

sheets of music, because if the rules are interpreted differently, I 

think that is a real problem. 

So the first question would go to the concern here on why there 

wasn’t a coordinated implementation and enforcement plan developed before the rule was issued. But to build beyond that, I think 

setting up a working group and extending the conformance period 

clearly does not solve the coordination concerns, for this reason. 

As SEC Commissioner Gallagher pointed out, there is a clear difference between banking regulators and rule-based market regulators like the SEC and the CFTC. As he said, prudential regulators, such as the banking agencies, can indeed employ their discretion in seeking to obtain their desired regulatory outcomes. 

Their prudential regulation and statutory confidentiality protections, not to mention their embedded staff’s constant interaction 

with regulated entities, allows them to bend their rules when they 

go too far. Those are his words. 

The Commissioner’s rules-based regulatory regime, however, contains no such wiggle room. Our rules, as Mr. Gallagher says, are 

rules, and when our examiners come across a rule violation, whether egregious and intentional or peripheral and accidental, they are 

required to record such violations. 

So without some further clarification, regardless of the time you 

have to work on this, isn’t this conflict in regulatory model going 

to become an issue? And let’s come around to why that wasn’t 

originally coordinated in terms of the implementation and enforcement plan developed before this rule was issued. Because I see this 

as part of an ongoing problem, and I would love to hear your response to this and how we are going to address it. 

Ms. WHITE. That is a very good question. 

Mr. ROYCE. Besides you are going to say you have a working 

rule. 

Ms. WHITE. No. Understood, understood. I think you are absolutely correct. At the end of the day, we have independent agencies 

with independent responsibilities. I think there is an acute awareness, you are hearing it today from, I think, all the panelists about 

the need not only to coordinate and reach consistency on interpretive guidance, but also on compliance and enforcement. 

34 

And it is true that—I will let Governor Tarullo or the banking 

regulators speak to what they do in the way of supervisory authority and responding to instances of violation—but clearly our examiners, if they find a violation, will record it. That doesn’t tell you 

precisely what the response after that will be. Is it a referral to the 

enforcement side? Is it guidance back to the firm in question? 

Mr. ROYCE. It is very complicated for me to understand. If that 

happens, you have one agency that says it is market making and 

you have another agency that says, no, it is proprietary trading. It 

would seem to me that you would want to work this out, because 

uncertainty in this is going to lead to real problems. 

Ms. WHITE. No question. 

Mr. ROYCE. Yes. 

Mr. CURRY. Congressman, we are committed to having interpretive consistency. I think the issue is we each regulate separate entities, legal entities. I am the supervisor of national banks and Federal savings banks. If an activity is being conducted in the bank, 

then we will exercise our legal authorities and take appropriate action that will either correct or, if necessary, enforce those provisions. We have a wide variety of tools that we can employ. 

But in terms of how the regulation should be applied, I think we 

can, and this working group is the vehicle for us sorting out what 

the proper interpretation is. And then ultimately, as Chair White 

said, we have to do what our independent agencies are required to 

do. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to start out by thanking all of you for your work individually and also as a working group. I understand there have been 

18,000 comment letters sent in. I think you took a fair amount of 

time, several years, in trying to work this out yourself and others, 

and I think you have come out with a good result. I think that we 

understand why all of the Wall Street banks are against this prohibition of proprietary trading, because it is a very lucrative business, made even more lucrative by the fact that it is subsidized by 

taxpayer funding. 

So when we originally started this discussion, a lot of fear, or at 

least a weakness that was pointed to repeatedly was the fact that 

U.S. banks, because of the Volcker Rule, were going to be less competitive with foreign counterparts. And as Governor Tarullo has 

pointed out, now it looks like the EU is moving in our direction, 

or in the direction of the Volcker Rule that you have carved out. 

Both the EU and the Vickers report as well seems to be pushing 

in that direction. And so there are less and less complaints about 

us being less competitive and there is more indication that the rest 

of the world is moving with us in a good direction. 

What I would like to know is, this is so complex and we have so 

many exemptions for hedging and market making, what do you 

see, as a group and individually, as the threats to undermining the 

Volcker Rule? What do you see as the greatest danger to either, 

like I say, undermining the prohibition on proprietary trading, or 

35 

where do you see the areas in the Volcker Rule that need reinforcement more immediately? 

Ms. WHITE. On the market-making exemption, that’s one that we 

obviously wrestled with very, very carefully in order to make certain that we were both being true to the statutory prohibition 

against proprietary trading but also true to the exemption so that 

the markets could continue to work with the depth and liquidity 

they need to. That is an area I think, on both sides, one will want 

to closely focus on, both in terms of possible evasion, but also are 

there more unintended impacts we are having that we didn’t intend to have on legitimate market-making? 

Mr. LYNCH. Great. 

Mr. GRUENBERG. Congressman? 

Mr. LYNCH. Sure. 

Mr. GRUENBERG. I would come back to the importance of compliance and enforcement here. I think that is really going to be the 

key both to the effectiveness and the credibility of the Volcker 

Rule. It is a challenging supervisory task to distinguish legitimate 

market-making and hedging activities from proprietary trading. 

And the thoughtful and effective implementation of the compliance 

requirements to monitor that activity, so that it becomes a routine 

part of the operations of the firms overseen by their responsible 

regulators, really I think is going to be the key challenge here. If 

we can do that, we should preserve the legitimate activities for the 

firms and for the markets. And reduce the risks particularly for 

these large systemic companies. And I think that would be a meaningful achievement. 

Mr. LYNCH. Thank you. 

I know that most of the oversight agencies, at least Mr. Tarullo, 

Mr. Gruenberg, and Mr. Curry, are self-funded. 

Chair White, is your ability to strengthen those areas threatened 

by the lack of funding for the SEC? 

Ms. WHITE. The lack of adequate funding is a significant concern 

at the SEC. We have vast responsibilities, quite apart from DoddFrank and the Volcker Rule and even quite apart from the JOBS 

Act, that under current funding levels, we don’t have enough in my 

judgment to responsibly do what we should be doing for our markets and for investors. 

Mr. LYNCH. I agree. Thank you. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, the Chair of our Oversight and Investigations Subcommittee, for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

In previous hearings, I have asked who the lead regulator is 

when it comes to Volcker, and I just figured it out today. 

Governor Tarullo, it is you and it is the Federal Reserve, just 

based on the answering of questions, the willingness to step in, and 

the deference that others on the panel give to you. I guess when 

you have five big regulators, independent regulators sitting on the 

same panel, there ends up being an alpha dog. 

And, Governor Tarullo, today that is you. 

36 

The other takeaway I have from this hearing is that we still 

don’t know the costs or exactly what this rule will do. That is kind 

of clear after listening to everyone’s testimony and the questions 

we have today and—or the negative impacts that this rule is going 

to have on the market. 

But, in particular, Chair White, I want to ask you about rigorous 

cost-benefit analysis. Now, you had dissenting opinions within your 

Commission, saying that there was not a rigorous cost-benefit analysis performed. What say you? 

Ms. WHITE. I say that we basically, I think all the regulators 

did— 

Mr. MCHENRY. I am just asking about you. 

Ms. WHITE. All right. Just us. We thoroughly addressed the economic considerations related to the Volcker Rule. The proposal teed 

up specific questions to elicit alternatives, costs, and impact information. I know our economists at the SEC were very much involved in that. And then I think I have listed several other important ones where we responded as a result of that economic analysis 

and to the comments that raised those economic impacts. 

Mr. MCHENRY. So where could I see this rigorous cost-benefit 

analysis? 

Ms. WHITE. I think you will see it if you look throughout the 

adopting release to how we addressed the comments that raised 

those economic issues. 

Mr. MCHENRY. Do you have specific page numbers or a section 

that I could reference? 

Ms. WHITE. I could give you some, either provide them to you 

after this or give you some now on some of the issues that I have 

already mentioned. I am happy to provide it. 

Mr. MCHENRY. In your predecessor’s term as Chair of the SEC, 

I asked Mary Schapiro about this. She codified as a matter of policy with the Securities and Exchange Commission a memo in the 

summer of 2012 on cost-benefit analysis. Did you adhere to the 

principles of that memo? 

Ms. WHITE. The guidance wasn’t specific. The framework of the 

guidance wasn’t specifically applied to the adopting release. This 

was an adoption. We were authorized under the Bank Holding 

Company Act, and all the agencies proceeded in that manner. I 

think the reality of the joint rulemaking was that no one agencyspecific individualized procedures were applied to it. We were all 

bound under the Administrative Procedure Act (APA) and complied 

with that, which included the economic considerations. 

Mr. MCHENRY. Your predecessor bound your agency to adhere to 

the memo and the principles within that memo on cost-benefit 

analysis. I will follow up with you on this. 

Ms. WHITE. And I am very committed to that guidance as well. 

Mr. MCHENRY. This is the biggest rulemaking you will undertake 

probably in your tenure, probably in my tenure in Congress. And 

that is why I think it is important whether or not you adhered to 

that principle. 

Commissioner Gallagher in his dissent spoke of a fatal flaw in 

this rule and asked for a 2- to 3-week delay and re-proposal. And 

he also says that it is riddled with problems. Obviously, you disagree. Would you speak to that? 

37 

Ms. WHITE. Ultimately, I know two of our Commissioners and I 

independently considered the issue of whether a re-proposal made 

sense or was required. I also took counsel on the legal issue from 

our General Counsel. It was not required. And my ultimate judgment was that it also would not be wise to do a re-proposal. I 

think, again, we have had a lot of folks comment both on the panel 

and among the members about the 2-year period of conformance 

during a number of engagements, and both by comment letters and 

meetings that we had. There was also persisting market uncertainty that obviously a further delay would have perpetuated that. 

So ultimately, I judged that was not either required or the right 

course to take. 

Mr. MCHENRY. I have a final question. It is really just a yes-orno question. Governor Tarullo, Chairman Gruenberg, are you all 

prepared through a joint process to rule on the second round of living wills as being insufficient? Are you all prepared to do that? 

Mr. TARULLO. We are right now engaged, the two agencies are 

right now engaged in the discussion and the evaluation of the resolution plans that have come in and what next steps to take. And 

so, we surely are moving forward. 

Mr. GRUENBERG. I think the answer is yes, Congressman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Connecticut, Mr. Himes, for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. 

And thank you all for being here and testifying and for your very 

hard work on this complicated regulation. This was not an easy assignment that came out of Dodd-Frank, but it was an important 

one. And I can’t help but observe that my friends on the other side 

of the aisle with their relentless barrage of criticism on your efforts 

and on the concept behind the Volcker Rule offer, as usual, no alternative. And therefore, we are left to conclude that they believe 

that federally-assisted institutions with access to FDIC insurance 

and the reserve window and other forms of taxpayer subsidies 

should, in fact, be permitted to take proprietary bets to bet in such 

a way that they might be in the future required to turn to the taxpayers for support. I think that is an unfortunate point of view. 

I do think, however, that they and others raise very significant 

concerns about the complexity here. And one thing I wanted to 

make an argument for in acknowledging, I think, the very constructive side of your setting up this interagency working group, I 

would ask that you consider very seriously creating a formal process within that interagency group for banks to obtain interpretive 

guidance on questions that they will certainly have. I would further 

suggest that for clarity and to avoid some of the concerns that have 

been expressed here today, that you formally establish a timeframe—it could be 2 to 3 months, whatever was appropriate—in 

which a bank or other entity could get a clear response from this 

group. 

I don’t have a question here other than perhaps to ask whether 

this, in your estimations, or whether the interagency group would, 

in fact, have that as a function and whether you think it can provide timely interpretive guidance to banks with questions? 

Mr. TARULLO. Without regard, Congressman, as to whether a formal process with deadlines ought to be established, what lies beVerDate Nov 24 2008 17:06 Sep 19, 2014 Jkt 088524 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\88524.TXT TERRI
38 

hind your question I think everybody here would agree with, that 

we need to have a process of getting consistent interpretations out. 

Again my expectation would be, but this is admittedly based on the 

experience with three banking agencies, that an iterative process 

will be really helpful in a lot of instances where an institution can 

say, look, this is the kind of issue we are facing. What do you 

guys—meaning the interagency group—think? I think everybody 

here would say if it turns out that something more formal is warranted, then we will certainly think about it. I would certainly 

think about it. 

Mr. HIMES. I certainly appreciate the work that you did and the 

speed with which you did it on the trust preferred issue that perhaps could have been avoided to begin with. But the speed with 

which you acted I think was important and hopefully serves as a 

model. And again, I would just really urge that this interaction 

group has as part of its mandate a formal process for interpretive 

guidance. 

Just shifting gears here, I share the chairman’s concern and 

Chairman Garrett’s concern about the exemptions for sovereign 

and municipal debt. I think they did a pretty good job of explaining 

that those two instruments can operate on both extremes of the 

credit spectrum. My understanding is that the rule itself provides 

no special ability for the regulators to necessarily control the credit 

quality of those instruments which may be subject to this exemption. So my question is, apart from the ordinary course of business, 

safety and soundness, regulators who will presumably be overseeing the balance sheet of these institutions, is there anything 

within the Volcker Rule context that can give us comfort that you 

will be vigilant on perhaps lower credit quality, sovereign or muni 

debt that could take advantage of the exemptions? 

Mr. TARULLO. I would note again that ultimately the Volcker 

Rule is about proprietary trading; it is not about the credit quality 

of any particular asset. It doesn’t go to the issue—I think as many 

people have pointed out, there may be some assets that are high 

credit quality, at least as issued. And, by the same token, there 

may be some that are not, but as long as they are not held in the 

trading book and they are not traded, then they just require a capital charge against them. 

Mr. HIMES. I do understand that. 

Mr. TARULLO. That is the core point, Congressman. 

The other thing just, again, to note, the exemption, of course, for 

U.S. Treasuries and municipals is something that was in the statute. The limited exemption that was provided in the final rule is 

taking into account the fact that a bank which is from a particular 

home country, like a U.S. bank with its relationship with U.S. 

Treasuries, is likely to have a particularly special role for the sovereign debt of its home country. And that was really the genesis 

of that. 

Mr. HIMES. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I appreciate it, and I 

do appreciate your time being here. And I know my colleague, Mr. 

39 

Meeks, on the other side touched on this a little bit, but I would 

like to explore our international competitiveness, and I can’t help 

but note that we are the only advanced economy that has adopted 

this prohibition on proprietary trading. And I am concerned that, 

therefore, we are creating significant competitive disadvantage. 

It is my understanding, Chair White, that you had talked a little 

bit about this in response. 

But to my other colleague, it was just bringing up sort of the absence of a solution. It is kind of like saying I am going to punish 

my oldest son for the boneheaded move of one of his friends that 

got his friend into trouble, but my son has been living by the rules 

and hasn’t had any problems. So, the logic of saying, if we are not 

going to come up and replace this Volcker Rule with another rule, 

somehow we condone bad behavior by somebody else is ridiculous 

on its face. 

But please explore with me a little bit of how in the world this 

does not put us at a tremendous competitive advantage. Through 

the contacts I have in Europe—and I worked through the TLD and 

a number of other organizations, I have relationships over there in 

London and Germany and other places—the indications that I have 

had is that they are not going to be adopting a Volcker-like rule 

at this point. I have extensive connections in Canada as well. They 

are telling me the same thing. In fact, they are all saying, hey, we 

will take the business because you guys are now making it more 

difficult. So please, somebody help me with this. 

Mr. TARULLO. Congressman, I can go back and say that it is the 

case that as of now, nobody has adopted something that looks like 

a version of the Volcker Rule. But, as I earlier indicated, what has 

been I think worthy of remark is that immediately after the adoption of the Volcker Rule in the United States as part of DoddFrank, there was essentially no interest in the concept in other 

major financial centers. And in the intervening few years, what we 

have seen is not just, as in the case of the European Commission’s 

proposal, something that looks very much like Volcker, but we have 

seen in other countries things that are variants on ring fencing 

within institutions, variants on different capital requirements for 

different kinds of activities, some of which would go beyond what 

we have in the United States. 

Mr. HUIZENGA. So you are willing to wait until they put something in place to keep us at a competitive disadvantage. Do you acknowledge that we are at a competitive disadvantage? 

Mr. TARULLO. Congressman, whenever one prohibits a firm or a 

set of firms from doing anything, there is at least going to be some 

change in the ground on which they compete. 

I think the question of the magnitude of that is a pretty important one, and this gets back to Chair White’s point about how market making, for example, which is a vital service that large brokerdealers play, is something that I think everybody on this panel 

wants to see preserved. And that is why, as I said earlier, the implementation that takes account of the variations and the characteristics of instruments that will put it in the markets is important. 

Mr. HUIZENGA. Let’s let Chair White address that, then, quickly. 

Ms. WHITE. Just very quickly, I think that the statute has—obviously mandates that this rule carries out. We were very sensitive 

40 

within those parameters of the statutory mandates to competitive 

effects. I think I gave a couple of examples of that. But in terms 

of the magnitude of the effects, I think that is something you have 

to look at, going forward. 

Mr. HUIZENGA. Okay. That was close to being a congressional answer, in that you gave no answer. But—maybe let’s do this. Show 

of hands, who here is satisfied with putting the rule in place knowing that it will put us at some sort of competitive disadvantage for 

whatever period of time until the rest of the world catches up? Are 

you all comfortable with that? Are you all uncomfortable with that? 

Mr. TARULLO. Congressman, I think I am comfortable with where 

we are here. But, again, let’s not lose sight of the reasons why 

countries put financial regulations in, in the first place. 

Mr. HUIZENGA. We are not talking about why we have financial 

regulations. We are talking about this particular financial regulation, one that puts us at a competitive disadvantage, when there 

hasn’t been a problem with it here in the United States. I heard 

that someone brought up the London Whale. All right. That is a 

completely separate issue from what we are dealing with here in 

the United States. So we are not saying that it is either the 

Volcker Rule or we are not going to have any rules, and it is going 

to be the Wild, Wild West. The question is, is the Volcker Rule actually going to put us at a competitive disadvantage with the rest 

of the world? Does anybody want to use the last 5 seconds? 

Mr. CURRY. It is possible. But we need to see what the full impact of the rule is and we will need to see what other jurisdictions 

do to compare what the competitive impact will be or will not be. 

Mr. HUIZENGA. Mr. Chairman, if you will indulge me, I will be 

sending a letter to each one of you asking how long you are willing 

to wait. Is it 6 months? Is it a year? Is it 3 years? What period of 

time do you need for that information? Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney, for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. 

Thank you for the opportunity to ask some questions. And I want 

to thank all the panelists and associate myself with the remarks, 

those that I understood, of the gentleman from Massachusetts, Mr. 

Capuano, in praising the panel for your expertise, your hard work, 

and your difficult job that you have. 

I was not here when Dodd-Frank passed. I came in 2011. So I 

think it would be helpful for me to take a step back, maybe back 

to the 10,000-foot level. Kind of where you were with Mr. 

Hultgren’s question and just ask why you think the Volcker Rule 

is important in the framework of things that were put in effect by 

Dodd-Frank? 

Governor Tarullo, why don’t we start with you. You mentioned 

capital requirements in your opening statement. Could you pull it 

all together and tell us why you think Volcker is important in that 

framework? 

Mr. TARULLO. Sure. As I think probably many people have heard 

me say—more than they wanted to hear—to me, the two key parts 

of post-crisis financial reform are: first, higher, better calibrated 

capital requirements; and second, addressing the risks, the run 

41 

risks associated with the short-term wholesale funding market. 

Whatever one’s views of the group of factors that contributed to the 

crisis itself, there is no question but that run on short term—runs 

on short-term wholesale funding was the precipitating event. That 

is what we saw with Bear, that is what we saw with Lehman, that 

is what we saw with AIG. So those to my mind are the two key 

elements of a post-crisis macro prudentially oriented regulatory 

system. I think where Volcker fits in is trying to push a bit at the 

too-big-to-fail problem and more generally with the moral hazard 

issue of effective taxpayer subsidization of certain activities, which 

did not seem to the drafters of the rule necessary or appropriate 

for the financial intermediaries who operate with the benefit of 

FDIC insurance or potential access to Fed discount window or relationships with their affiliates that have similar advantages. 

So what I think it tries do is to carve off one kind of activity that 

does seem particularly related to moral hazard on the one hand 

and, on the other hand, isn’t something that the drafters would feel 

is necessary to a full-service financial intermediary. 

Mr. CARNEY. Thank you. 

Chair White, Comptroller Curry, would either of you like to add 

anything, particularly as it relates to your particular responsibilities? 

Ms. WHITE. In terms of the Volcker Rule, I think Congress made 

the judgments that Governor Tarullo is essentially talking about to 

try to promote financial stability and to also make it at least more 

certain or more likely that the taxpayers are not on the hook for 

future distress events. 

I think, as a regulator, our primary responsibility is to carry out 

those mandates with due regard for impacts on legitimate market 

activities and any impacts on the smooth functioning of our financial markets. And we have tried to do that in this rule. 

Mr. CARNEY. Comptroller Curry, do you have anything to add? 

Mr. CURRY. I would essentially agree with Governor Tarullo and 

Chair White. I would add that as the prudential supervisor of the 

large national banks, I think our focus going forward is really to 

make sure— 

Mr. CARNEY. Most of this activity comes under your purview, correct? 

Mr. CURRY. Between Chair White and my office. 

Mr. CARNEY. Broker-dealers? 

Mr. CURRY. Right. So our focus now is really to take the rule as 

written and to have appropriate on-the-ground oversight of those 

activities. 

Mr. TARULLO. Congressman Carney, if you could remind Congressman McHenry of what you just heard, I would appreciate it. 

Mr. CARNEY. I would be happy to do that. 

I only have a minute left. Chairman Gruenberg, I would like to 

go back to Mr. Luetkemeyer’s observation with you about the fund 

and the mergers that were kind of pushed. 

I just finished reading Chairman Bair’s book, and she would 

argue, I think, that those mergers saved the fund money. Do you 

have a comment on that and her perspective? I don’t know if you 

have read her book or not. 

42 

Mr. GRUENBERG. The mergers in the short run were part of a 

strategy to stabilize the system during the crisis. I think from that 

perspective, they were effective. But they did leave us with a set 

of institutions that are both large and complex and diversified that 

pose significant risks to the financial system. 

And that really comes back to one of the reasons for the Volcker 

Rule. The proprietary trading that is the focus of the rule is concentrated in these large diversified companies with insured depositories. Pushing that activity out so it doesn’t benefit from the safety net is really what the rule is about. 

Chairman HENSARLING. The time of the— 

Mr. CARNEY. I just want to thank all of you again for your great 

work. 

Chairman HENSARLING. —gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney, for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

I think we have had some good discussion today about the risks 

and the challenges that the industry faces with possible conflicts 

in interpretation, possible competing of interest between the five 

groups. I want to talk about that a little bit. I want to try to get 

a specific example. I have worked hard on trying to come up with 

the perfect example. The best could I do so far is imagine a situation where we have a large broker-dealer that also happens to be 

a bank and it is trading an interest rate swap in its banking subsidiary. I think that covers everybody, and I am pretty sure if I can 

add the proper counterparties, I could make sure that everybody 

has some say in that particular trade. So here is my question: We 

have this entity. It is today. It is February of 2014. The rule comes 

in place in summer. And they come to you today, and they say, 

‘‘Look, we would like to set up our compliance. This includes things 

like programming our computers, doing IT.’’ Can anybody explain 

to me, articulate for me a clear, defined, absolutely crystal clear 

path that bank can follow in setting up those compliance regimes? 

Ms. WHITE. You mentioned broker-dealer first. And at the risk 

of being accused of being the second alpha regulator, the SEC is 

the primary regulator of the broker-dealer. I think we would be the 

first stop on that, and obviously, to the extent that other regulators 

are involved with other aspects. 

Mr. MULVANEY. I want to cut you off. You are the first stop, but 

certainly not the only stop. Right? 

Ms. WHITE. Right. 

Mr. MULVANEY. They go to you first. My guess is that somebody 

else might think they are also primary, or certainly an important 

secondary. Is there a single plan that this institution can follow in 

order to create a compliant system to meet the requirements of the 

rule? I think the answer is no, by the way. I am not trying to trick 

anybody. But that single clear plan doesn’t exist, does it? 

Ms. WHITE. I think, again, that we come to the primary regulator 

first. To the extent there were other issues that other regulators 

had an interest in, I think, as the primary regulatory, we would basically initiate those discussions. 

Mr. MULVANEY. But if they need it today, that doesn’t exist. 

Right? 

43 

Ms. WHITE. No. It does exist today. 

Mr. MULVANEY. So a broker-dealer can come to you and say, 

look, this is what we want to trade in next year. And could you tell 

them without any concerns whatsoever, if you do X, Y, and Z, you 

are going to be fine? 

Ms. WHITE. That wouldn’t be the initial conversation on the spot. 

But, to the extent that the consultation with the other regulators 

led to that result, which you would hope it would. Very quickly, actually. 

Mr. MULVANEY. Governor Tarullo? 

Mr. TARULLO. Congressman, I think you asked the right question. But there are a couple of things about this. First, to a considerable extent, and I don’t know exactly what one hears from everybody, but what I heard a lot of from the industry was when it came 

right down to it, they didn’t actually want two very specific sets of 

quantitative metrics right now because they were fearful that any 

set of metrics we would come up with now would not take into account the variations in things like relative depth of liquidity. 

Mr. MULVANEY. Let me skip ahead in the future, then, and see 

if I can articulate another challenge which I am concerned that we 

face, which is, this entity is now trading this particular facility. 

The Fed says it is okay. And then a couple of weeks later, the OCC 

says it wasn’t. The Fed says the trade was okay; the OCC—or, pick 

one; it doesn’t make any difference who it is. One of you say it is 

okay; the other says it is not. Is there a defined, clear regime that 

they can follow to resolve that inconsistency? 

Mr. TARULLO. Congressman, the trade itself will take place within a specific legal entity. Whoever is the primary regulator of that 

entity has, by congressional delegation, the regulatory authority 

over them. So, in the end, they are— 

Mr. MULVANEY. And if they say it is okay, then this bank is fine. 

It doesn’t make any difference what anybody else at the table says. 

Mr. TARULLO. If it is a broker-dealer and the SEC is okay with 

what practice the broker-dealer is pursuing, then none of the rest 

of us has the authority, under the Volcker Rule and the statute, 

to say, no, that is incorrect. 

Now, as you have heard all of us say, nobody wants to be in the 

position of which de facto there is inconsistent information being 

given to people in different legal entities. So that is what we are 

striving to avoid. But there is not really shared jurisdiction over a 

particular trade that is going to take place— 

Mr. MULVANEY. Why do we need a working group, then? If you 

are in charge of one type of trade, why do you have to have a working group on that trade? 

Mr. TARULLO. Because we would want to assure that the same 

kind of activity pursued in a broker-dealer or a London subsidiary 

of a U.S. bank holding company or a national bank is treated about 

the same, even though there are different primary regulators. That 

is the reason for the coordination. 

Mr. MULVANEY. Thank you. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 5 minutes. 

44 

Mr. SHERMAN. I have been listening to this hearing, and it 

sounds like Wall Street. It sounds like the interior pages of the Financial Times. And I want to try to bring this down to how it is 

going to affect local businesses in our own districts. 

Because this Volcker Rule is going to prevent certain entities 

from buying and holding certain securities under certain conditions. We have plenty of entities that will invest in the S&P 500. 

The super creditworthy, super prime borrowers are getting lower 

interest rates and better terms than at any time in decades. And 

the American economy, if it fails, will not fail because, in 2014, 

there weren’t enough entities and funds and hedge funds buying 

stocks and bonds from the biggest corporations. If we fail, it will 

be because you can’t get a $250,000 loan for a startup business; you 

can’t expand your business and get a $10 million loan. The $50 million financing necessary by medium businesses is completely unavailable. 

Now, sitting where the witnesses are now, we had Jamie Dimon 

awhile ago, who said he just couldn’t find good business borrowers 

in the United States. He had all this money, and didn’t know what 

to do with it. He sent it to London, and it was eaten by a whale. 

All of us in every part of this room know good businesspeople who 

should be getting loans and aren’t getting them. And those are the 

businesses that are going to have 100,000 employees 20 years from 

now, 10 years from now if they get financing, and we have a system where they can’t. 

We have big banks that only want to buy securities. They are 

itching to make big bonuses on the sophisticated financial transactions involving tens of millions of dollars or hundreds of millions, 

billions. 

And then we have regulators, who I am told when you see a loan 

at prime plus 5, prime plus 6, instead of saying thank you for making that loan to a business that isn’t perfectly creditworthy, you 

need a little bit more capital to do that, instead, regard the banker 

as somehow betraying the financial system for doing what Jimmy 

Stewart told us in ‘‘It’s a Wonderful Life’’ a bank is supposed to do. 

What can you do as regulators to prod the banks into making 

those small- and medium-sized business loans, instead of using all 

their capital on Wall Street? And what can you do as regulators to 

stop penalizing banks because they make loans where there is a 1- 

in-20 chance that the loan will go bad, even a 1-in-50 chance that 

the loan will go completely bad, and ask only for reasonable reserves, rather than a view that the bank has violated its charter 

by making a prime plus 6 loan? I will address that to anyone on 

the panel. Mr. Curry? 

Mr. CURRY. Congressman, from our standpoint, as a prudential 

regulator, we do want to see banks lend to creditworthy borrowers. 

And that is really— 

Mr. SHERMAN. If I could interrupt, it used to be that character 

mattered, that relationships mattered. That banking was an art 

and you evaluated whether the person could pay you back. Do you 

let your regulators look at that at all, or is character thrown out 

the window? 

45 

Mr. CURRY. We look at underwriting processes that the individual institution has. As long as they adhere to safe and sound 

underwriting practices, that should be it. 

Mr. SHERMAN. It is now—I wish that was true in the San Fernando Valley, sir. All I hear is, ‘‘We made a loan; the fair rate of 

interest was prime plus 5; therefore, we were in violation of what 

the regulators expected us to do.’’ 

Let me ask one more question. And that is, this whole Volcker 

Rule is designed to prevent the need for future bailouts. But the 

fact is that as long as we have institutions which are too-big-to-fail, 

they are going to engage in risky behavior, especially if they are 

not banks. And then they are going to come to Congress and say, 

We are going to pull down the entire economy with us if you don’t 

bail us out. 

This bill gave you the right to break up the too-big-to-fail. Why 

aren’t you using it? 

Chairman HENSARLING. Seeing no witness take up the question 

and given that the time of the gentleman has expired, the witnesses may answer in writing. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And I thank each of you for being here today. Much has been 

said from my colleagues on the other side today lauding the 

Volcker Rule, as they have hundreds of other rules that have been 

promulgated, lauding Dodd-Frank, lauding your efforts. I think, 

frankly, it just bears some questions in my mind as it relates to 

the implementation of this rule and the impact it will have. 

I quote Mr. Volcker. He acknowledged that the activity sought to 

be prohibited by the rule had nothing to do with causing or exacerbating the recent financial crisis. 

Mr. Geithner said, ‘‘If you look at the financial crisis, most of the 

losses that were material for the weak institutions and strong relative to capital did not come from those proprietary trading activities. They came overwhelmingly from what I think you can describe as classic extensions of credit.’’ 

So it begs the question to me of the importance of this rule and 

the impact it is going to have in a counterproductive way. What do 

you say to the American people, what do you say to those consumers, to those banks who can’t find capital, to consumers who 

need help with their businesses, to the compliance costs of these 

banks and the time afforded, that the impact of what we are having, if, in reality, those who would seemingly know best have said 

that it had really no core relationship to the financial crisis as relates to systemic risk? 

What is your opinion of that? And if we don’t have a clear understanding of that, where do we go from here? It is troubling to me 

that so much has gone into this now, this enormous impact of this 

rule on top of rule after rule and the impact it is going to have. 

Could you kindly comment on why we are here today? 

Mr. TARULLO. In the first instance, Congressman, we are here 

today because you called a hearing asking to get an explanation of 

what we did to implement a law that Congress passed. And in the 

first instance, I think many of us have mentioned this, but we do 

46 

have to come back to the fact that this is a judgment that Congress 

made, and it is, as I tried to explain earlier, I think, a piece of a 

broader regulatory system that is being put in place post-crisis. So 

I think that is probably the most important point. And we are obviously bound to implement whatever it is that Congress passes. 

Second point, as I did say earlier, is I think— 

Mr. PITTENGER. Quickly, because I would like to hear from four 

other people. 

Mr. TARULLO. Okay. If you ask those who developed the Volcker 

Rule in the first place, possibly even including former Chairman 

Volcker, I think they might say— 

Mr. PITTENGER. The point is, though, they said clearly it had 

nothing do with systemic risk. 

Mr. TARULLO. I think what they would probably say— 

Mr. PITTENGER. But that is the point that my colleagues are 

making, that we just don’t get it. 

Mr. TARULLO. As you try to adjust a financial system to the integration of capital markets and traditional lending, they would say 

you have to be aware of the problem already encountered but other 

problems that you might encounter. 

Mr. PITTENGER. Thank you. 

Chair White, do you have any comments you would like to make? 

Ms. WHITE. The only thing to add is that Congress again made 

the judgment that the Volcker Rule would promote financial stability and protect the taxpayers from future crises and losses. 

Mr. PITTENGER. They did make that decision, my colleagues on 

the other side of the Dodd-Frank bill. It just begs the question to 

me if, in fact, it had no bearing according to these apparently major 

individuals in the financial world, Mr. Volcker, Mr. Geithner, it 

begs the question seriously to the American people and to financial 

institutions the impact it is having in terms of availability of capital as well as the compliance costs related to it. 

Any other comments? 

Mr. GRUENBERG. Only to acknowledge that I think former Chairman Volcker in proposing this idea perceived these activities as 

posing systemic risk. And I think he, from his perspective, which 

was the impetus for this, saw it as a significant source of systemic 

risk going forward. And that is what he proposed addressing. I 

can’t disagree with that premise— 

Mr. PITTENGER. So we are an answer looking for a problem. That 

is what was stated earlier. Thank you. Would you like to make a 

comment? 

Mr. WETJEN. I was just going to add something similar to what 

Chairman Gruenberg said. I think it is also a prospective-looking 

policy as well. 

Mr. PITTENGER. Thank you very much. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. 

Mr. FOSTER. Thank you, Mr. Chairman. 

And thank you to the panelists. 

I would like to return for a moment to the CLO issues. 

Chairman Gruenberg, on, I guess, page 10 of your testimony, you 

mentioned that securitization that currently includes assets other 

47 

than loans can be excluded from the definition of covered funds if 

they divest impermissible assets during the conformance period. 

And my question to you is, is that really realistic in light of the 

fact that the managers of the securitizations actually have a fiduciary duty to all their investors and not just some bank that may 

have a relatively minor position in the fund? And how would you 

get past that legal morass on the time scale needed? 

Mr. GRUENBERG. As I indicated earlier, I think in many cases, 

it is feasible for that to be done. As you indicated, for CLOs in 

which they are only made up of loans, they are not subject to the 

Volcker Rule. There are the category of CLOs that have impermissible assets. I think—and there are a lot of those which have relatively small numbers of impermissible assets, a small volume. I 

think in that case potentially divesting those assets, so-called curing the CLO for purposes of compliance with the Volcker Rule is 

manageable. For others with larger numbers of impermissible assets, it poses a greater challenge and I think would be the focus, 

frankly, for our review of the issue. 

Mr. FOSTER. I would like to just ask more general questions 

about the grandfathering and the legacy issues that Governor 

Tarullo mentioned. For example, the immediate mark-to-market 

that is triggered when you have to sell these things, there is a potential, I guess, for possible capital relief, if that gets triggered. 

And just the need for clarification is I think very important. If you 

look at the drop in new CLO issuance, which has been going 

around at maybe 6 billion a month has now dropped to less than 

2 in the last month, sort of underscores the need for clarification 

as soon as possible on this. 

And just the other area that is important for—as it relates to 

grandfathering is just the fire sale scenario and what can you do 

to mitigate that if in fact there is a big class of these that has divested. So do you have any comments on this, just general comments on the range of the most aggressive grandfathering, the 

least aggressive grandfathering that you can imagine emerging 

from future deliberations? 

Mr. TARULLO. Congressman, as Chairman Gruenberg indicated, 

I think those are several of the issues that we want to get more 

information on, which is to say first the breadth of the issue. Because if we are not facing that widespread an issue, the fire sale 

problem is probably going to be minimized. But if that is not the 

case, then you say, okay, is the timeframe that is already provided 

adequate? And, of course, that actually depends on whether the instrument in question has been depreciating in value or appreciating. But we are getting information on this, and I think we will 

have more, and we will be able to make a more granular decision 

on the questions that you pose. 

Mr. FOSTER. Do you have a time scale when you might make 

those decisions? 

Mr. TARULLO. I don’t want to speak for everybody in saying we 

have a timeframe. I think, as I said earlier, and as somebody else 

reiterated, it is the top of this list of this interagency group to be 

addressed. It is the second of the important interpretive issues. 

Mr. FOSTER. I guess I have time to change topics for a moment. 

In the securities lending part of the Volcker Rule, I was struck by, 

48 

I guess, that at the point the Government seized AIG, 40 percent 

of the losses were from securities lending. So this is not necessarily 

a safe operation in all business conditions. I was just wondering if 

everyone here is satisfied that what is done in securities lending 

is going to—obviously, AIG was not a bank. But those sorts of 

losses would be prevented in advance by the way securities lending 

is dealt with. 

Mr. TARULLO. I, myself, do not, Congressman. This is one of 

those areas where, as I said in my prepared remarks, we can’t rely 

just on the Volcker Rule to assure the safety and soundness of 

trading operations. And I do think under this more general heading 

of addressing the risks associated with short-term wholesale funding, that the risks associated with securities financing transactions 

and the margining practices do need to be addressed for just the 

reasons you identify. 

Mr. FOSTER. Okay. Thank you very much. 

I am almost out of time. I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Illinois, Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And I thank you all for being here. I want to start quickly just 

by commending the regulators represented here for acknowledging 

in the preamble this impact disruptions in the tender option bond 

market may have on municipalities and the market for certain municipal securities. I certainly hope that as banking entities who 

wish to continue participating in this market, as they work to 

make their tender option bond vehicles Volcker-compliant, that 

they will find your cooperation and assistance. I think that is very 

important. 

I want to address this first question to Governor Tarullo. And 

ask if any of you have responses, as well. But how can one posit 

that a $6 billion trading loss, which resulted in no taxpayer losses 

and resulted in a profitable quarter and year, evoke outrage, but 

a loss of twice as much in regulatory fines is never mentioned? Is 

that illogical? And should we no longer fine Wall Street banks because it threatens the stability of the financial system? 

Mr. TARULLO. Congressman, I think that the concerns elicited by 

the Whale episode were the concerns associated with the problems 

that led up to it, that is, why did it occur? Why was risk management not being applied to the activities of the firm? It is a very 

good thing that the firm was as highly capitalized as it was. And, 

it underscores what I have always said is the importance of having 

a very well-capitalized firm because it can deal with unanticipated 

as well as anticipated problems. Just as if one saw an instance in 

which there had been a very poor underwriting job done of a particular loan which turned out to result in a loss that the bank could 

take, we would think our bank examiners would be negligent if 

they didn’t go back in and ask, are other such problems proliferating and do you have systems in place which manage the risks 

correctly? And I think that was what the London Whale episode 

did. It showed a variety of infirmities in risk management, documentation of hedging, which directly do relate to the concerns of 

Volcker. But— 

49 

Mr. HULTGREN. I understand what you are saying. I do think 

there is—you also look at just the discrepancy of how things are 

approached, where regulatory fines are not acknowledged. And yet 

oftentimes are double the amount, oftentimes. I just think there is 

a question there of how we approach these things. 

Let me move on. I only have a couple of minutes here. I wonder 

if I could address this to Chairman Gruenberg. Some banks are 

certainly waiting until July 2015 to divest themselves of Volckerprohibited securities. Prompted by the rule, we have already seen 

banks of CLO and re-REMIC portfolios. But in the case of reREMIC, the status of these securities under the rule seems unclear. At least my office has heard calls for clarification. I wonder 

if you could please explain the status of re-REMIC securities under 

Volcker and if the treatment is universal, or are there different 

treatments for some agency re-REMIC securities compared to others? 

Mr. GRUENBERG. Without getting into the—that is certainly one 

of the issues on our list to be reviewed, in addition to the tender 

option bonds and municipal securities issue that you mentioned at 

the outset. So, I would add the re-REMICs to that as well. 

Mr. HULTGREN. Say that again? I’m sorry. 

Mr. GRUENBERG. I would add the re-REMICs category to the first 

two issues you raised in your comments in regard to tender option 

bonds and municipal securities as matters that have been raised in 

terms of the application of the Volcker Rule and issues for us to 

review and consider. 

Mr. HULTGREN. Again, I would echo from the opening remarks 

that I hope we can count on your cooperation and assistance. Because, again, I am hearing from folks back in Illinois, concern, uncertainty of knowing how these are going to be handled. So as that 

moves forward, I appreciate that it is a priority. My hope is that 

there will be good communication and cooperation as we work 

through further understanding of what they can expect here. 

In my last minute, I will open this up to anyone. This may get 

back to a lack of thorough economic analysis. But I wonder if any 

of you have seen or tried to estimate the impact of a Volcker-promoted forced sale of certain securities on the markets for those securities. And particularly, how will this affect community banks? 

Won’t a forced sale in any part of the market drive the prices down 

and hurt potential returns? 

Mr. CURRY. Congressman, that is certainly an issue that we are 

going to address as we review the CLO issue. So, it is a matter of 

concern. 

Mr. TARULLO. I think—just to supplement that—we have probably heard from those who think that they are in that situation. 

The TruPS issue quite possibly did pose, did pose that risk. It is 

not clear, at least based on current information, that there are 

other categories of things that would be subject to short-term divestiture which would provoke a fire-sale-like reduction in prices. But 

as others have said, that analysis of those things will continue. 

Mr. HULTGREN. My time has expired. I yield back. Thank you, 

Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

50 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison, for 5 minutes. 

Mr. ELLISON. Let me thank the chairman and also thank all of 

our witnesses today. 

I would just like to ask for unanimous consent to enter a particular article into the record from the American Banker. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. ELLISON. It is entitled, ‘‘Volcker is Right. Prop Trading 

Kills,’’ and it is by Donald R. van Deventer. And he essentially 

makes the following point, that I agree with: Congress asks you to 

prevent banks from engaging in proprietary trading because there 

is ample evidence out there that proprietary trading in certain 

cases resulted in harms to firms, families, the Nation, and our 

global economy. And it is not just JPMorgan Chase and the whole 

London Whale case. It is also Citigroup. It is also Bank of America, 

Morgan Stanley, and the Royal Bank of Scotland. These banks 

used their deposit insurance subsidy to trade in high-risk investments. Those instruments failed, which would have caused these financial Goliaths to fail but for government assistance. 

So, I just put that in there. If you care to comment on that, my 

comment or this article, feel free to do so. But I think a lot of my 

colleagues have gone over the Volcker Rule in particular. So because it is not all the time that I have this kind of expertise here, 

I am going to ask about some other things. 

First of all, I would like to ask Mr. Wetjen a particular question. 

Mr. Wetjen, I am a supporter of fair, robust regulation of financial 

markets. I am also concerned that the SEC and the Commodity Futures Trading Commission don’t have adequate funding to do the 

job we have asked them to do. I wonder if you would reflect on 

what I just said. If you were funded at, say, an additional 5 percent 

of your current level, what would you be able to do to build on your 

efforts to oversee the market? Could you address this issue? 

Mr. WETJEN. Congressman, I appreciate the question. As I mentioned in my opening remarks, we are resource-constrained at the 

CFTC. We have taken on significant new responsibilities since the 

passage of Dodd-Frank, mostly as it relates to derivatives reforms 

under Title VII, but also as it relates to Volcker. So it continues 

to be a challenge. We do need additional staff. We do need additional technology investments to help decipher, make sense of the 

data that has been coming in for a number of years. But some of 

the additional data related to swaps has come in more recently, 

within the last year. So, it is definitely an issue of concern for me. 

Mr. ELLISON. Thank you, sir. 

Ms. White, would you like to address this issue? 

Ms. WHITE. Yes. Thank you for the question as well. 

The SEC, again, as I said earlier, we are resource-constrained. 

And in order to carry out the really vast responsibilities we have, 

even apart from Dodd-Frank implementation issues and JOBS Act 

implementation issues, we need more people to do that, more experts to do that. So, we appreciate the question. 

Mr. ELLISON. Thank you. 

And sticking with you, Chair White, on December 12, 2013, the 

Consumer Financial Protection Bureau (CFPB) released the preliminary results of their study on the use of mandatory pre-dispute 

51 

arbitration provisions in consumer financial products. The study 

found an overwhelming majority of consumers must participate in 

mandatory pre-dispute arbitration agreements. Your agency, like 

the CFPB, was given authority under Dodd-Frank to act to study 

the use of mandatory pre-dispute arbitration clauses in customer 

contracts. 

I am concerned about the prevalent use of these clauses and contracts that investors in my State and across the Nation signed as 

a condition to working with their brokerage and investment advisor 

firms. Is this a cause of concern for you? Do you have a position 

on these pre-dispute arbitration provisions? And have you had a 

chance to study the effect of these contracts? 

Ms. WHITE. There are very strong views on that issue, on both 

sides, as you have indicated. A number of people have raised serious concerns about that. At the Commission, we have the authority 

to decide whether to act and what to do about that. We have not 

yet come to an agreement on that. We clearly will have further 

briefings from the staff on that and focus on that in the relatively 

near term. But I can’t tell you what the outcome will be at this 

point. 

Mr. ELLISON. Okay. All right. 

I think I have a few seconds to go. And with that time, I would 

like to just see—Mr. Curry, if you don’t have time to answer, if you 

could just respond in writing. I have had a lot of constituents with 

Islamic-sounding names telling me they are losing access to bank 

accounts. I wonder if you have seen this coming up, if it is something that has come to your attention, and if there is any response 

you may have. 

I see the light is red. Maybe could you respond in writing. 

Mr. CURRY. I would be happy to get back to you. I understand 

that is an issue in your district, and we are looking into it. 

Mr. ELLISON. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner, for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

And thank you, panelists. This committee has received voluminous testimony from corporate CFOs, community banks, and academic experts that the costs of the Volcker Rule will dwarf its highly speculative benefits and that the rule will do significant damage 

to job creators and to our economy. In fact, the chairman referenced in his opening statement the academic research conducted 

by Washington University in St. Louis, in my district, which concluded that the Volcker Rule will take $800 billion out of the economy. 

Now, given the extensive evidence and testimony from those on 

the ground that the Volcker Rule will do far more harm than good, 

and given that you did not do a formal cost-benefit analysis, can 

someone on the panel please let me know what your evidence is to 

the contrary? Because I can’t find the benefits in your 932-page 

rule. 

Chair White? 

Ms. WHITE. I would say this, as I said earlier, obviously, there 

was, to begin with, a congressional judgment made to require the 

52 

Volcker Rule. The agencies are all charged with carrying that out 

to be both faithful to the statutory mandate but also very—which 

is part of the statutory mandate, also very sensitive to the exemptions from that rule. We clearly, all of us in the process of this rulemaking, from the proposal stage to the adoption stage, solicited information and data and analyzed data on the impacts. 

Mrs. WAGNER. What are the results of that data? 

Ms. WHITE. I think you saw the results of that. That inquiry and 

analysis led to changes that I talked about earlier in order to reduce some of the negative impacts of the rule, the costly impacts 

of the rule. But we began with a statutory mandate to carry it out. 

Mrs. WAGNER. I listened to some of your testimony. And specific 

to the SEC, Chair White, I think you said you thoroughly addressed the economic considerations of the rule. And I am trying 

to figure out where that is. Has a formal cost-benefit analysis been 

done on this by the agency? 

Ms. WHITE. It depends, I guess, to some extent what you mean 

by ‘‘formal cost-benefit analysis.’’ The statute— 

Mrs. WAGNER. Where is the report? Where is the research? 

Where is the information? Where is the report? 

Ms. WHITE. The statute under which we enacted the rules of the 

Bank Holding Company Act, it doesn’t specifically require or even 

implicitly require a formal cost-benefit analysis. What we did do, 

all five agencies did do, was to tee up a full range of questions as 

to the economic impacts, and solicited the data. And if you look at 

the adopting release, you will see those discussed throughout in 

terms of the agency’s thinking on that and conclusions on that. 

Mrs. WAGNER. A lot of others have sure done analyses of these. 

And all I am seeing is cost, cost, cost, cost, cost coming from the 

business side, from the academic side, and from many experts on 

this. And I would be very interested in knowing just where specifically in all of the analysis that you have done, where the benefit 

side of this is. I would submit that this is a very costly rule to our 

economy and to the American people. 

Turning to something different, following up on Mr. Mulvaney’s 

line of questioning, I am a little concerned about this working 

group and who has the power of enforcement, what lanes each one 

of your agencies are staying in. Who is in charge of the working 

group that you formed? Have you formed a working group? 

Mr. TARULLO. Yes. But by definition, as with all interagency 

committees, the agencies are independent and they each have a 

role, which has been given by statute. 

Mrs. WAGNER. Who is in charge of the working group? 

Mr. TARULLO. Nobody is in charge of the working group. 

Mrs. WAGNER. Have each of you assigned somebody to the working group? 

Mr. TARULLO. Yes. 

Ms. WHITE. Yes. 

Mrs. WAGNER. So you have a list of those who are assigned to 

this working group. For instance, will the SEC’s Enforcement Division have to consult with the working group before opening a 

Volcker Rule investigation? 

Ms. WHITE. The answer to that is we are not required to do that, 

no. We are an independent agency and are not required to do that. 

53 

Again, however, everyone is focused on consistency across the agencies. 

Mrs. WAGNER. You are focused on consistency, you each have 

your areas of jurisdiction, you say you have formed a working 

group. I am just confused as to who has the power of enforcement, 

and what happens when you differ? 

Perfect example: Let’s say the OCC approves a trade or a trading 

strategy that a bank is doing, and then 6 months later the SEC 

comes in and says that those trades were in violation of the 

Volcker Rule. How do you resolve that conflict? 

Mr. CURRY. At the OCC, we supervise the national banks and 

Federal savings banks. We have the authority and we examine on 

a regular basis to see if they are in compliance with all rules, including the Volcker Rule. If they are in violation of it, we have the 

enforcement authority. If it is a question of judgement as to whether— 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Murphy, for 5 minutes. 

Mr. MURPHY. Thank you, Mr. Chairman. 

And I want to thank all of the witnesses for your time and your 

testimony today. 

I know this has been talked about quite a few times today already, but I just want to follow up. Last December we had Secretary Lew here in front of the committee, and I asked him how 

the five agencies that are here today were going to split up the responsibility of implementing and enforcing the Volcker Rule. 

He said the current regulatory structure would flow through to 

the Volcker Rule depending on an institution’s primary regulator 

and the products they trade. However, there are quite a few financial institutions in our country that are working to try to comply 

currently, and it has become clear to us that two or more different 

agencies could be responsible for supervising and enforcing the 

Volcker Rule for one institution. 

How is this going to work and who is ultimately going to be responsible for each of these discrepancies? And we can just go left 

to right. 

Mr. Tarullo? 

Mr. TARULLO. Again, Congressman, there will only be one primary regulator for any given financial institution or an affiliate 

within a bank holding company. That is the way the law allocates 

responsibility. 

Mr. MURPHY. And they will know ahead of time, they will know 

as of now— 

Mr. TARULLO. Yes. Broker-dealers know who they are, State 

member banks, non-member banks, yes. 

The inconsistency issue comes up across either different affiliates 

or different institutions. It is the effort to assure consistency in interpretation within broker-dealers on the one hand and national 

banks on the other that animates the coordination efforts. 

Mr. MURPHY. I see some heads nodding, but is everyone in agreement? 

Ms. WHITE. If I could just add, taking broker-dealers, again the 

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54 

iner of broker-dealers as well, and will in fact be primarily responsible for their compliance with Volcker. 

Mr. MURPHY. Okay. Mr. Curry? 

Mr. CURRY. It is our goal from the beginning to make sure that 

we have consistent application of the rules. We view this working 

group as the mechanism for doing it so that when we do apply it 

to the entities that we regulate as the primary supervisor, in my 

case national banks and Federal savings banks, we know that we 

are doing it in a consistent manner, that there is not a material 

difference between the treatment between a bank versus a brokerdealer under a bank holding company. 

Mr. GRUENBERG. The issue here is created by the fact that we 

have diversified financial companies in the United States with multiple entities with different functions and different regulators. So 

you could have in the same company a national bank, a brokerdealer, and a State-chartered institution, all under a holding company structure, each with a regulator responsible for the activities 

of their particular part. 

So coordinating that is really the challenge. It is why all of the 

agencies here have responsibilities for some part of that diversified 

firm, and it is why the rule required all of the agencies here to participate. And the challenge of implementation is really going to be 

identifying the lead regulator for the part of the company that is 

impacted and having that regulator engage with the others. And 

that is a process that goes on in other areas of financial regulation, 

as has been pointed out, and is clearly going to be a key challenge 

here. 

Mr. MURPHY. Mr. Wetjen? 

Mr. WETJEN. Thanks, Congressman. 

The only thing I would add is that the statute makes it very 

clear that we have an obligation to coordinate. And the other point 

I would make is something I mentioned in my oral statement, and 

Governor Tarullo reiterated it today at the hearing, which is there 

have been opportunities for at least the CFTC and the SEC to go 

their own way given what was required in the statute. That is not 

the choice that was made. Instead, we went beyond what was required in an effort to try and be faithful to the requirement under 

Section 619 that we— 

Mr. MURPHY. We are running low on time here. I just want to 

follow up, and I am wondering if you all fear that there are going 

to be different interpretations? And the reason I ask this is because 

when Secretary Lew was in here, he expressed confidence that, 

‘‘This leaves some space for supervisors to engage with the entities 

that they supervise to work through some detail.’’ 

So if this is a constant process of interpretation, how do we ensure that there is consistency? 

Mr. CURRY. Again, we decided that it was important to have a 

formal forum, and the working group was created for that purpose. 

Mr. MURPHY. So all in the working group? Okay. 

Mr. TARULLO. It is probably important to note, Congressman, 

that a lot of the issues, particular kinds of instruments that are 

traded at broker-dealers, are not likely in many instances to be 

traded at national banks. So in a lot of cases, they actually won’t 

55 

be things that cross a lot of lines, but in some they are, and that 

is where the coordination and consistency mandate comes in. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

It has been interesting reading some of the reports that have 

come out about you all working together, the dysfunction, withholding documents, backstabbing, cutting people out, soliciting to 

get people to come across town for fried chicken. It is kind of like 

Congress. Maybe that was very effective. 

You have had a lot of questions about the proposed rule and final 

rule and a lot of commentary about the economic analysis, and I 

am going to stick to those topics. I think it is fair to say that there 

was concern that the questions that were brought up in the proposed rule were far different than the actual final rule. And many 

of us argue you should have reproposed the rule to solicit further 

commentary. 

I think a perfect example of that is there was surprise with regard to the CLO issue and the TruPS issue. Had you reproposed 

the rule, you would have been able to solicit commentary and get 

some insight into folks’ concern. 

Why didn’t you repropose the rule? The best reason I have heard 

is, we had an arbitrary timeline that we were trying to meet. But 

beyond that, it makes sense that you would have reproposed it and 

solicited comments. Why didn’t you do that? 

Ms. WHITE. As I said earlier, that is an issue that I considered 

independently. I think two of my Commissioners have commented 

on that. And the judgment was made, both in consultation with 

counsel, there was no requirement, given where the adopting rule 

was coming out, that we repropose. 

Mr. DUFFY. With all due respect— 

Ms. WHITE. But we had a 2-year period of extensive input. And 

we teed up some of the questions that could have elicited some of 

these facts that have come out since then. 

Mr. DUFFY. There are requirements and there are best practices. 

And you are aware of best practices as well. 

Ms. WHITE. Absolutely. 

Mr. DUFFY. And, I would ask you all, how many comments did 

you receive about CLOs and TruPS? Probably not very many, because it wasn’t included in the proposed rule. And there was a 

whole slew of issues that don’t match up. And I think the best 

practice, though you may not have been required, would have been 

to repropose the rule and get additional input from participants. 

And I still haven’t heard a good reason why you wouldn’t have 

done it except for this arbitrary timeline. 

Does anyone have a better reason? 

Ms. WHITE. It wasn’t an arbitrary timeline. I made the judgment 

that there was market uncertainty out there as well, we had had 

a 2-year period of extensive engagement on these issues, and that 

we should go forward. 

Mr. DUFFY. We are talking about market uncertainty, and I don’t 

think we have done much to alleviate that. We might have aggravated the problem of uncertainty with the rule itself. And frankly, 

56 

I think, Ms. White, you had said that it wasn’t wise to do a reproposal, which doesn’t make sense to me, either. 

But I want to move on to the economic analysis. Ms. White, you 

have indicated that an economic analysis was done, I think you referenced the preamble to the rule. But you are very well-versed in 

doing economic analysis at the SEC. You are required to do it for 

the rules that you put out, the Division of Economic and Risk Analysis. Did you do one of those for the Volcker Rule? 

Ms. WHITE. As I said earlier, I think what you are alluding to 

is our guidance, which actually does not require that it be applied, 

but I am a great proponent of that. 

Mr. DUFFY. Binding guidance, yes. 

Ms. WHITE. In this instance, again, we all as regulators really 

thoroughly addressed the economic considerations. 

Mr. DUFFY. No, no, no— 

Ms. WHITE. Because it was a joint rulemaking, the dynamic of 

the joint rulemaking, I know that no agency’s specific guidance applies to each other. 

Mr. DUFFY. My question for you is simple: Did you do it? 

Ms. WHITE. But we did do the analysis I have described. 

Mr. DUFFY. You didn’t go through the appropriate channels of 

doing an economic analysis which you do for other rules that you 

implement, right? No. You did not do that. 

Ms. WHITE. The framework of our guidance wasn’t applied, but 

we did— 

Mr. DUFFY. If you did that analysis— 

Ms. WHITE. —absolutely thoroughly consider economic considerations and responded to them. 

Mr. DUFFY. If you would send me the report, I would love that. 

Do you object to now, ex post facto, doing an economic analysis, 

as done by the Division of Economic and Risk Analysis, per the 

memo from Ms. Schapiro? 

Ms. WHITE. Again, I think we have done that analysis and we 

are focused on implementation at this point. 

Mr. DUFFY. You have done that analysis, the Division of Economic— 

Ms. WHITE. We have done the economic analysis that I have described and I think— 

Mr. DUFFY. Do you object to doing the one that is consistent with 

the memo of Ms. Schapiro when you do other rules through the 

SEC? Will you do that same analysis for us ex post facto? Yes or 

no? 

Ms. WHITE. Even though we have— 

Mr. DUFFY. Is that a no? I only have a couple of seconds left. 

Ms. WHITE. The guidance wasn’t applied. I don’t think it would 

be constructive at this point to do that, for the reasons I have indicated. 

Mr. DUFFY. And I guess just quickly, I have a bill out that will 

amend Section 13 of the Bank Holding Act. So if you are going to 

make any modifications to the Volcker Rule you actually go 

through an economic risk analysis. Any objections to going through 

that process should there be any modification? 

My time is up, Mr. Chairman. I hear you pounding the gavel. I 

will yield back. 

57 

Chairman HENSARLING. If the gentlelady wants to give a quick 

one-word answer? 

Ms. WHITE. I think I answered, sir. 

Chairman HENSARLING. Okay. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And I thank each one of you for being here today. 

I think it was Mrs. Maloney earlier in the hearing suggested that 

we concentrate on implementation. There has been a veritable cascade of questions on implementation, and that is where mine will 

fall. The subject has been finely tuned at this point of the hearing. 

Mr. Himes really got down to the point. Chair White, you had 

affirmed that we have an acute awareness that we need to work 

together. And I am not sure exactly what Mr. Tarullo might have 

said that got him the alpha, whatever designation he got, but 

something along the lines that the process is well-established and 

we don’t see why we would have trouble. 

But Mr. Himes went ahead and got a little more focused and 

said, are you going to have a formal process? And I think your response, Mr. Tarullo, was that if it is so warranted, yes, we will do 

it if, it is warranted. 

And I guess my question is, are there circumstances that would 

warrant it that you can come up with in the recent past, or circumstances where you really come together and you all agreed on 

who said the football went over into the end zone. So are there 

good examples of coordination or bad examples of lack of coordination? 

Mr. TARULLO. Congressman, I think as you and a number of others have suggested, at least implicitly, this is a new kind of exercise here, because it has the banking regulators for whom there is 

a long track record of coordinating on an ongoing basis with the 

market regulators. So I don’t know that the precedents based on 

the bank regulatory cooperation will carry over. I think they will. 

The reason I answered earlier that at some point something 

more formalized could be useful is because I just don’t know at this 

juncture whether the success in having three agencies with staffs 

who have known one another well in doing coordination, all of 

whom are bank regulators, will carry over. I think it will, but it 

may not. And if it doesn’t, then we may need to formalize things 

a little bit more. 

Mr. PEARCE. I think from this side of the aisle, I would refer to 

a Washington Post article of 2012, and it is referring to exactly 

such a circumstance. It leads in saying that part of the problem is 

that the different agencies weren’t communicating, specifically talking about the SEC. 

Mr. Wetjen, Mr. Luetkemeyer was the last to call on you. But 

with your two agencies, within the final paragraph or next to the 

last paragraph it says, when the agencies began talking, they 

worked at cross purposes. The report said that in one instance the 

SEC asked MF Global not to take the money set aside to help cover 

funds owed to the securities customers, while the Trading Commission told the firm to do exactly the opposite, to cover the firm’s future customers. And so that resulted in $1.6 billion being taken out 

58 

of segregated accounts. And we have people sitting in the room who 

are supposed to stop this. It is against the law to do that. And the 

regulators on such a major issue are exactly opposite. 

And so you heard Ms. Wagner’s questions. Who is driving? Who 

will be the one to cut the baby in half or whatever we are going 

to do to make a decision here? I think there is a need for a formal 

process. I went through the table of contents of your stuff, I didn’t 

go through the full 900 pages, I thought I could find it, to where 

maybe you did address that if we come to a crossroads, that so and 

so is going to be the alpha male, female, or whatever—I don’t know 

if I would use the word that Mr. McHenry did—but still somebody 

has to be in charge, otherwise we wind up with customers getting 

nailed for $1.6 billion. 

Have you done a postmortem between the two agencies, how did 

this thing occur, that the regulator is sitting in with Senator 

Corzine and he takes $1.6 billion? 

There was another article, by the way, which says the authorities 

came to believe that an employee in MF Global’s Chicago office 

transferred the customer money, perhaps inadvertently. 

Do you know how that sounds to our constituents, just an inadvertent transfer of $1.6 billion? Did you do a postmortem, either 

one of you, of the whole group? Has the working group sat and 

looked at the MF Global circumstance to say there are really reasons we need a process here? 

Mr. WETJEN. I think, if I could say, the real postmortem in the 

MF Global situation is that while it is obviously a horrible circumstance where for some amount of time there were customers— 

Mr. PEARCE. Could you speak up just a bit? The postmortem was 

what? 

Mr. WETJEN. I’m sorry. What I was trying to say is that the real 

postmortem is that while there were customer moneys lost for some 

amount of time, they are all going to be recovered in the bankruptcy process. 

Mr. PEARCE. Okay. Mr. Chairman, please, I know I am over, but 

I am hearing one of the top regulators in the country say no harm, 

no foul. I’m sorry. That was your response, sir, that the money is 

going to be recovered. That is beside the point. It was against the 

law to take the money out, and one of the top five regulators in 

the country said no harm, no foul. 

I yield back, Mr. Chairman. 

Mr. WETJEN. Congressman, that is not what I said. In fact, there 

are enforcement actions under way to address what was happening 

in the MF Global situation. I was simply pointing out as far as any 

discrepancies at the staff levels between the agencies, those were 

unfortunate. I am not aware of what those discrepancies were. But 

the good news, the silver lining, if you will, is the fact that the 

moneys will be recovered. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

I know we have covered this ground a little bit today, but I do 

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59 

rently structured would have the serious potential to disrupt the 

collateralized loan obligation market. 

In particular, I am concerned about the impact that it could have 

on banks, some community banks in my home State of Kentucky. 

Obviously, these banks are looking for an attractive risk adjusted 

return, but as you know, the final rule arbitrarily converts AAA 

CLOs from debt securities into the equivalent of equity, thereby 

making them ineligible to be held by banks. It is estimated that 

banks would have to divest or restructure up to $70 billion of CLO 

notes if the rule as currently structured continues as a final 

unamended rule. 

And I want to share with you just a comment from a community 

bank, or part of a letter from a community bank to you all as the 

regulators promulgating this rule. This is a bank in my home 

State: ‘‘We have invested $36.5 million in senior CLO debt securities, and they constitute 14 percent of our carefully managed investment portfolio. We view our investment portfolio as a conservative and much less risky component of our balance sheet. 

‘‘The final rule, if applied without clarification, could have a material negative impact to our capital base, which we have been trying to preserve after the losses incurred the past 4 years. It is hard 

to understand as a management team that was able to take a financial institution through the darkest days of the financial crisis 

why we should be presented with another existential threat based 

solely on an arbitrary and expansive interpretation of this final 

Volcker Rule. It would be tragic if our efforts over the last 2 years 

were considerably set back as a result of this final rule.’’ 

And I would also note, I am concerned about the impact that it 

could have on credit availability for American companies, some in 

my district. Tempur-Pedic, which is a great company that has an 

innovative mattress that it has been able to provide to the American people, but, as you know, the CLOs currently hold approximately $300 billion in commercial loans to some of the most dynamic and job-producing companies in America. 

So it seems to me that the medicine that is being prescribed 

here, banks forced to sell billions in CLO paper in a fire-sale scenario and the loss of credit availability to dynamic companies like 

Tempur-Pedic in my district would be far more damaging to the 

credit markets than the perceived illness, which is the hypothetical 

that banks would suffer some kind of losses from holding AAA CLO 

paper. CLO paper, by the way, performed very, very well during 

the financial crisis. 

So I appreciate your testimony, Governor Tarullo, saying that 

this is a priority in the interagency working group, that you are 

going to reexamine this. I encourage you to do so on an expedited 

basis. But I want to know why this is even an issue to begin with, 

given the fact that the statutory language in Dodd-Frank under 

Section 619 carves out the sale or securitization of loans in market 

making. 

And I am just reading from the statutory language: ‘‘Nothing in 

this section shall be construed to limit or restrict the ability of a 

banking entity or nonbank financial company supervised by the 

board to sell or securitize loans in a manner otherwise permitted 

by law.’’ 

60 

Why is this even authorized in Dodd-Frank? 

Mr. TARULLO. The short answer, Congressman, is because some 

of these CLOs don’t have just loans in them that have been 

collateralized and bundled together; they have other securities as 

well. 

Mr. BARR. Okay. So if— 

Mr. TARULLO. If you have a pure CLO, it would not be a covered 

fund. 

Mr. BARR. Okay. So how do you reconcile that with the risk retention rules under Section 941? You are characterizing CLOs 

under that rule as debt, but under this rule you are characterizing 

them as equity. Am I missing something? 

Mr. TARULLO. No. Again, it is the presence of the other securities, other than the collateralized loans. So that is why I was saying earlier, there are two distinct issues here. One, will the CLO 

market adjust going forward to include only loans and to bundle 

them together, which would then come under the exemption you 

just cited? They may not, in which case we have to think about 

that, too. But as I earlier said, the legacy issues are for the many 

CLOs that include things other than the loans. And that is where, 

as I said, our process is going to have to see whether we can find— 

Mr. BARR. Ten seconds left, if I could. Could you give us a timetable on when you might be able to fix this and also whether the 

fix could be a grandfathering of existing CLO investments so as not 

to create turmoil? 

Mr. TARULLO. I can’t answer either of those questions precisely 

right now other than to tell you that this is the first issue on the 

agenda. 

Mr. BARR. We may be following up with you on that timetable, 

because we do need a solution here. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

I thank the panel for taking time to be with us here today for 

this very important hearing. You have been here with us for a few 

hours. So thank you for taking time out of your busy schedules. 

Governor Tarullo, as you know, the Volcker Rule includes an extended transition period designed to allow the preexisting legacy 

private equity investments of banking entities to run off naturally. 

These investments provide capital to small and medium-sized businesses throughout the country. 

However, as currently written, the rule effectively prevents 

banks of any size from taking advantage of this runoff period for 

existing investments in illiquid funds, which seems contrary to the 

intent of the exemption. It also will force banks to liquidate these 

investments at fire sale prices. 

With that in mind, please tell me how you plan to address these 

issues so regulated banks are not forced into taking significant 

losses on the investments. When is the Federal Reserve going to 

address the comments that it received expressing concern with respect to this aspect of the regulations? 

Mr. TARULLO. So, Congressman, as I was discussing earlier with 

some of your colleagues, the timing is in part for some institutions 

61 

driven by accounting rules where there has been depreciation of 

the assets in question. 

More generally, I think everyone on the panel knew that there 

would be some divestiture required as a result of the rule, and that 

is why the period was created. We will be looking, as I indicated 

in an earlier answer, to see whether the quantum of particularly 

covered funds that are going to be divested in the conformance period are such as to raise these kinds of risks of fire sales. That is 

the information we are going to be gathering and that we will presumably be getting from the firms. 

As someone mentioned earlier, a number of firms, particularly 

the larger firms, have already been divesting in anticipation of the 

rule. 

Mr. ROTHFUS. Yes. We will be following up with you on that in 

writing. We are looking for a commitment that you would be interested in fixing this issue as it goes forward. 

We have spent the last 3 hours, more than the last 3 hours talking about the Volcker Rule and the tremendous amount of time 

that your respective agencies put into developing the rule: 932 

pages; 297,000 words. 

Mr. Curry, Mr. Gruenberg, GAO’s report regarding proprietary 

trading notes, ‘‘Staff at the financial regulators and the financial 

institutions we interviewed also noted that losses associated with 

lending and other risky activities during the recent financial crisis 

were greater than losses associated with stand-alone proprietary 

trading. For example, one of the firms reported increasing the reserves it maintains to cover loan losses by more than $14 billion 

in 2008, and another of the firms increased its loan loss reserves 

by almost $22 billion in 2009. Further, FDIC staff, whose organization oversees bank failures, said they were not aware of any bank 

failures that had resulted from stand-alone proprietary trading.’’ 

Did any of the 450 banks that failed during the crisis fail because of proprietary trading? 

Mr. GRUENBERG. On the failure issue, we have had actually 492 

since 2008. I don’t know that you can identify proprietary trading 

as the cause of failure. 

Just to shed light on the issue, I think the activity of proprietary 

trading is really largely a function of the very large institutions, 

and those were not the ones, frankly, among the 492, and that may 

be part of the issue here. 

But to directly answer the question, it is true, of the institutions 

that failed, we wouldn’t identify proprietary trading as the cause, 

but I am not sure that is really the key question here, because it 

is the concentration of the activity among the larger institutions 

that I think is what would need to be examined. 

Mr. ROTHFUS. Again, but the Volcker Rule is aimed at proprietary trading. And we went through the crisis, and not one of these 

banks failed because of proprietary trading. Isn’t that true? 

Mr. GRUENBERG. Yes. 

Mr. ROTHFUS. Yet we know that these institutions are still going 

to be able to take positions in GSE paper, Fannie paper, Freddie 

paper, municipal securities, as the chairman mentioned, Detroit, 

Puerto Rico. Is it fair to say that at least with respect to the 

62 

Volcker Rule, the largest banks will still be able to take risky bets 

backed by the taxpayers on these exempted securities? 

Mr. CURRY. From a large bank supervision standpoint—I think 

Governor Tarullo mentioned this earlier—we are going to be looking at the issue even more broadly in terms of whether their direct 

activities other than market making or underwriting, things that 

occur inside the bank, that they are done in a safe and sound manner, that there are appropriate risk-management controls in place, 

which is a little bit different than the approach with the Volcker 

Rule. 

Mr. ROTHFUS. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The apparent last questioner is the gentleman from Ohio, Mr. 

Stivers. He is now recognized for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

I would like to thank all of you for your patience and for being 

willing to sit through tons and tons of questions. I have a few questions. A lot of mine are follow-ups, because when you go last, you 

get to follow up on a lot of other people’s questions. 

I do want to make a quick plug for something that Mr. Scott, Mr. 

Garrett, Mrs. Maloney, and Mr. Barr talked about on CLOs. I do 

believe that including CLOs doesn’t reflect congressional intent and 

could have really disruptive and avoidable impacts on businesses 

that use CLOs to obtain financing and create jobs, and I would ask 

all the regulators to take a serious look at whether the 

grandfathering that Mr. Barr suggested or some other clarity for 

folks who already own these CLOs. 

We are changing the rules in the middle of the game. Hopefully, 

you are all willing to take a look at that issue, because I think it 

could have a major negative impact on jobs and on a lot of these 

companies that have used these to finance jobs. So I guess, raise 

your hand if you are willing to take a serious look at those issues 

and grandfathering and whether there are solutions. Thank you. I 

will take that as unanimous agreement. I really appreciate that. 

The first question I have is for Mr. Tarullo with regard to private 

equity, and so this is kind of a follow-up on what Mr. Rothfus just 

asked. But I am hearing a lot of concern around the definition of 

illiquid funds from the Federal Reserve, that a lot of folks believe 

that they won’t be able to have access to the 5-year extension that 

could be granted to them because of the definition of illiquid funds. 

And I guess I am curious if you would be willing to take a look at 

that and its impact on the ability of folks to keep their capital or 

being forced to sell at a fire sale. 

Mr. TARULLO. Sure. I am happy to take any comments from people raising issues about it. 

Mr. STIVERS. Have you considered or did you consider in the 

Volcker Rule with regard to private equity investments made prior 

to May of 2010, which is the cutoff date for the Volcker Rule, allowing some kind of grandfathering even up to, say, 3 percent of Tier 

1 capital? Was that even something that was discussed or is it 

something that should be looked at? 

Mr. TARULLO. I don’t recall any discussion of that, Congressman. 

I think that it was more of a decision as to when to put a cutoff 

date that— 

63 

Mr. STIVERS. I would just urge you—maybe there should have 

been and maybe there still should be—so I would ask you to go 

back and take a look at that and capping that. Even if you cap it 

at some percent, these private equity investments have many of 

the same criteria of the loans that these banks make, and especially in the middle market, it is a big impact on a lot of these companies. 

My next question is for Ms. White. I want to shift a little bit to 

the municipal advisory rule. It is my understanding that the municipal advisory rule that was drafted was really intended to cover 

unregistered municipal advisors. Was that really the intent of that 

rule? 

Ms. WHITE. That was certainly the core. 

Mr. STIVERS. And so it troubles me that the way it is written, 

it requires issuers to hire a municipal advisor for every deal unless 

they do one of two things: put out an RFP; or sign a letter of engagement with a broker-dealer. 

I have the Ohio State University, which is partially in my district, and partially in Mrs. Beatty’s district. They are pretty sophisticated. They don’t want to have to hire a municipal advisor for 

every action, and it just creates an extra hassle for them and extra 

burdens and it forces them to sign a letter of engagement when 

they are pretty sophisticated. I guess I would ask you to take a 

look at that provision as well. 

Ms. WHITE. Yes. And I think we recently, in January, put out a 

number of answers to some questions, I am not sure about that 

one, but we also recently stayed the effectiveness of the registration 

to July 1st, and obviously we can consider any other questions. 

Mr. STIVERS. I really appreciated that. And I have asked Chairman Garrett to see if we could have a panel on that subject sometime between now and May to help give you some advice from us. 

The last thing I wanted to talk about is—and I know this has 

been hit on by many other people, Ms. Maloney and others—so who 

here thinks, raise your hand if you think having one lead regulator 

for issues like the Volcker Rule, where there are five agencies collaborating, makes sense. Does anyone think it makes sense to have 

a lead, at least one lead? 

Okay. If you don’t think it makes sense, could we go down the 

line and each one of you tell me how we deal with conflicts where 

you have different interpretations of the same rule, because unless 

you have one person in charge—I am a military guy—nobody is in 

charge. So I would love to hear how you think we should deal with 

conflicts. 

Mr. TARULLO. Congressman, I think this is the statutory scheme 

that we have been given, not just with respect to Volcker, but more 

generally. That is, we each have independent responsibility, we all 

try to be cooperative and accommodating to one another. But again, 

I don’t think anybody is in a position to cede and say that Chair 

White is the ultimate decision maker of things that go on in national banks. It is an artifact of the system that has advantages, 

but it is also has some disadvantages. 

Chairman HENSARLING. Fortunately for the panel, the time of 

the gentleman, and of all of the ladies and gentlemen, has expired. 

The Chair, though, does want to follow up with one request. The 

64 

gentleman from New Jersey, Mr. Garrett, had made a request. 

Clearly, you have noticed a lot of concern about liquidity in the corporate bond market within this hearing. And, in fact, Chair White, 

I think your Division of Investment Management has also echoed 

a concern. 

The request was made by Chairman Garrett that your working 

group report on the status of liquidity in the corporate bond market 

on at least a quarterly basis. I don’t think I gave him an opportunity to receive an answer from you, but I want to repeat that request. I would love an oral answer of yes, no, or maybe. 

Governor Tarullo? 

Mr. TARULLO. Maybe. And we will give it to you in writing, Mr. 

Chairman, you and Chairman Garrett. 

Chairman HENSARLING. Starting out with one ‘‘maybe.’’ Just for 

the benefit of the panel, if we don’t hear ‘‘yes,’’ I can guarantee you 

that you will get another invitation to testify before the committee 

in the next quarter. Maybe that will help color your answer, Chair 

White. 

Ms. WHITE. It doesn’t really change my answer. We will discuss 

it and get back to you. 

Chairman HENSARLING. I’m sorry? 

Ms. WHITE. I said we will take it up— 

Chairman HENSARLING. Okay. So that is two ‘‘maybes.’’ You can 

be a trendsetter here, Mr. Curry. 

Mr. CURRY. I think I am a ‘‘maybe.’’ 

Chairman HENSARLING. Three ‘‘maybes.’’ 

Mr. GRUENBERG. We need to look at it and get back to you. 

Chairman HENSARLING. Four ‘‘maybes.’’ 

Mr. WETJEN. I think the only thing I would add is I think probably the whole group would like to get to something in terms of 

what is being requested, but we just have to work through whatever obstacles there might be. 

Chairman HENSARLING. You will get a formal request to get this 

information to the committee on a quarterly basis if it is not forthcoming. It is something terribly important. We will have another 

hearing within the next quarter. 

But I do want to thank all of the witnesses for your testimony 

today, and I want to thank you for your patience. 

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. 

This hearing stands adjourned. 

[Whereupon, at 1:31 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

February 5, 2014 

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