Statement of
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
on
“Examining the Impact of the Volcker Rule
On
Markets, Businesses, Investors and Job Creation”
before the
Subcommittee on Capital Markets
and GSEs
and the Subcommittee on
Financial Institutions & Consumer Credit,
Committee on Financial Services,
United States House of Representatives;
Rayburn House Office Building
January 18, 2012
Chairmen Garrett and Capito, Ranking Members Waters and Maloney, and members of
the Subcommittees, thank you for the opportunity to testify today on behalf of the
Federal Deposit Insurance Corporation (FDIC) on the proposed regulations to
implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act), also known as "the Volcker Rule."
Last November, the FDIC, jointly with the Federal Reserve Board of Governors (FRB),
the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange
Commission (SEC), published a notice of proposed rulemaking (NPR) requesting public
comment on a proposed regulation implementing the Volcker Rule requirements of the
Dodd-Frank Act. On December 23, the four agencies extended the comment period for
an additional 30 days until February 13, 2012. The comment period was extended as
part of a coordinated interagency effort to allow interested persons more time to analyze
the issues and prepare their comments, and to facilitate coordination of the rulemaking
among the responsible agencies. In addition, on January 11, 2012, the Commodity
Futures Trading Commission (CFTC) approved the issuance of its NPR to implement
the Volcker Rule, with a substantially identical proposed rule text as the interagency
NPR. We look forward to receiving comments on the NPR.
In recognition of the potential impacts that may arise from the proposed rule and its
implementation, the Agencies have requested comments on whether the rule
represents a balanced and effective approach in implementing the Volcker Rule or
whether alternative approaches exist that would provide greater benefits or implement
the statutory requirements with fewer costs. The FDIC is committed to developing a final
rule that meets the objectives of the statute while preserving the ability of banking
entities to perform important underwriting and market-making functions, including the
ability to effectively carry out these functions in less-liquid markets.
Martin J. Gruenberg, Acting Chairman,
Federal Deposit Insurance Corporation
on
“Examining the Impact of the Volcker Rule
On
Markets, Businesses, Investors and Job Creation”
before the
Subcommittee on Capital Markets
and GSEs
and the Subcommittee on
Financial Institutions & Consumer Credit,
Committee on Financial Services,
United States House of Representatives;
Rayburn House Office Building
January 18, 2012
Chairmen Garrett and Capito, Ranking Members Waters and Maloney, and members of
the Subcommittees, thank you for the opportunity to testify today on behalf of the
Federal Deposit Insurance Corporation (FDIC) on the proposed regulations to
implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act), also known as "the Volcker Rule."
Last November, the FDIC, jointly with the Federal Reserve Board of Governors (FRB),
the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange
Commission (SEC), published a notice of proposed rulemaking (NPR) requesting public
comment on a proposed regulation implementing the Volcker Rule requirements of the
Dodd-Frank Act. On December 23, the four agencies extended the comment period for
an additional 30 days until February 13, 2012. The comment period was extended as
part of a coordinated interagency effort to allow interested persons more time to analyze
the issues and prepare their comments, and to facilitate coordination of the rulemaking
among the responsible agencies. In addition, on January 11, 2012, the Commodity
Futures Trading Commission (CFTC) approved the issuance of its NPR to implement
the Volcker Rule, with a substantially identical proposed rule text as the interagency
NPR. We look forward to receiving comments on the NPR.
In recognition of the potential impacts that may arise from the proposed rule and its
implementation, the Agencies have requested comments on whether the rule
represents a balanced and effective approach in implementing the Volcker Rule or
whether alternative approaches exist that would provide greater benefits or implement
the statutory requirements with fewer costs. The FDIC is committed to developing a final
rule that meets the objectives of the statute while preserving the ability of banking
entities to perform important underwriting and market-making functions, including the
ability to effectively carry out these functions in less-liquid markets.
My testimony today will include a brief overview of the statutory provisions, a description
of the rulemaking process undertaken by the Agencies, an overview of the proposed
Volcker Rule, and a discussion of our efforts to identify the potential impact of the
proposed rule.
Overview of the Volcker Rule Statutory Provisions
Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, is designed to
strengthen the financial system and constrain the level of risk undertaken by firms that
benefit, either directly or indirectly, from the federal safety net provided by federal
insurance on customer deposits or access to the Federal Reserve's discount window.
Specifically, section 619 amends section 13 of the Bank Holding Company Act (BHC
Act) to prohibit banking entities from engaging in proprietary trading activities and to
limit the ability of banking entities to invest in, or have certain relationships with, hedge
funds and private equity funds.
The challenge to regulators in implementing the Volcker Rule is to prohibit the types of
proprietary trading and investment activity that Congress intended to limit, while
allowing banking organizations to provide legitimate intermediation in the capital
markets. In general terms, proprietary trading occurs when an entity places its own
capital at risk to engage in the short-term buying and selling of securities primarily to
profit from short-term price movements, or enters into derivative products for similar
purposes.
While section 619 broadly prohibits proprietary trading, it provides several "permitted
activities" that allow banking entities to continue to provide important financial
intermediation services and to ensure robust and liquid capital markets. Most notably,
section 619 allows banking entities to take principal risk, to the extent necessary to
engage in bona fide market making and underwriting activities, risk-mitigating hedging,
and trading activities on behalf of customers. Other permitted activities include trading in
certain domestic government obligations; investments in small business investment
companies and those that promote the public welfare; trading for the general account of
insurance companies; organizing and offering a covered fund (including limited
investments in such funds); foreign markets trading by non-U.S. banking entities; and
foreign covered fund activities by non-U.S. banking entities.
To prevent banking organizations from engaging in otherwise prohibited proprietary
trading through one or more of the permissible activity exemptions described above,
section 619 provides at least three prudential safeguards. First, section 619 requires the
federal banking agencies, the SEC, and the CFTC to issue regulations that may include
restrictions or limitations on the permitted activities if appropriate. Second, section 619
states that no transaction, class of transactions, or activity may be a permitted activity if
it would: involve or result in a material conflict of interest between the banking entity and
its clients, customers, or counterparties; result, directly or indirectly, in a material
exposure by the banking entity to a high-risk asset or high-risk trading strategy; or pose
a threat to the safety and soundness of the banking entity or the financial stability of the
of the rulemaking process undertaken by the Agencies, an overview of the proposed
Volcker Rule, and a discussion of our efforts to identify the potential impact of the
proposed rule.
Overview of the Volcker Rule Statutory Provisions
Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, is designed to
strengthen the financial system and constrain the level of risk undertaken by firms that
benefit, either directly or indirectly, from the federal safety net provided by federal
insurance on customer deposits or access to the Federal Reserve's discount window.
Specifically, section 619 amends section 13 of the Bank Holding Company Act (BHC
Act) to prohibit banking entities from engaging in proprietary trading activities and to
limit the ability of banking entities to invest in, or have certain relationships with, hedge
funds and private equity funds.
The challenge to regulators in implementing the Volcker Rule is to prohibit the types of
proprietary trading and investment activity that Congress intended to limit, while
allowing banking organizations to provide legitimate intermediation in the capital
markets. In general terms, proprietary trading occurs when an entity places its own
capital at risk to engage in the short-term buying and selling of securities primarily to
profit from short-term price movements, or enters into derivative products for similar
purposes.
While section 619 broadly prohibits proprietary trading, it provides several "permitted
activities" that allow banking entities to continue to provide important financial
intermediation services and to ensure robust and liquid capital markets. Most notably,
section 619 allows banking entities to take principal risk, to the extent necessary to
engage in bona fide market making and underwriting activities, risk-mitigating hedging,
and trading activities on behalf of customers. Other permitted activities include trading in
certain domestic government obligations; investments in small business investment
companies and those that promote the public welfare; trading for the general account of
insurance companies; organizing and offering a covered fund (including limited
investments in such funds); foreign markets trading by non-U.S. banking entities; and
foreign covered fund activities by non-U.S. banking entities.
To prevent banking organizations from engaging in otherwise prohibited proprietary
trading through one or more of the permissible activity exemptions described above,
section 619 provides at least three prudential safeguards. First, section 619 requires the
federal banking agencies, the SEC, and the CFTC to issue regulations that may include
restrictions or limitations on the permitted activities if appropriate. Second, section 619
states that no transaction, class of transactions, or activity may be a permitted activity if
it would: involve or result in a material conflict of interest between the banking entity and
its clients, customers, or counterparties; result, directly or indirectly, in a material
exposure by the banking entity to a high-risk asset or high-risk trading strategy; or pose
a threat to the safety and soundness of the banking entity or the financial stability of the