Merkley, Brown Raise Questions About New Attempt to Weaken Volcker Rule

Merkley, Brown Raise Questions About New Attempt to Weaken Volcker Rule

Office of the Comptroller of the Currency recently announced plans to revise key provision of Wall Street reform, despite the fact that regulations were already finalized and evidence shows Volcker Rule is working

WASHINGTON, D.C. – Oregon’s Senator Jeff Merkley, the coauthor of the Volcker Rule, and Senator Sherrod Brown (D-OH), the top Democrat on the Senate Banking Committee, today sharply questioned new efforts to reopen and potentially weaken the Volcker Rule, a landmark 2010 Wall Street reform provision.

Their efforts follow a recent announcement by the acting head of the Office of the Comptroller of the Currency, one of five federal banking regulators in charge of enforcement of the Volcker Rule, that the agency is acting alone and requesting public input on revising the Volcker Rule.

In a letter to Treasury Secretary Steven Mnuchin, the Senators pointed to strong evidence that the Volcker Rule has been working as intended, and that many of the Wall Street arguments against the rule have not been borne out by the facts. They wrote, “Given the strong evidentiary basis for the Volcker Rule, and the lack of empirical evidence that it is causing any harm to the Main Street economy, we urge you to join us in rejecting this unnecessary, costly, and disruptive re-litigation of the final Volcker Rule. That a joint rulemaking has been reopened by an acting agency head who has never been confirmed by the United States Senate, and who only recently represented in private practice the very institutions he now regulates, is inappropriate.”

The Senators noted that both President Donald Trump and Secretary Mnuchin have previously expressed support for the Volcker Rule, and questioned whether the Trump Administration is now changing its position, at a significant potential cost to financial stability and the economy. They asked Mnuchin to submit information to the Senators regarding any meetings that Treasury officials have taken about changing the Volcker Rule, including lists of participants in those meetings; and data or metrics that the department is considering related to the Volcker Rule, including data compiled by Wall Street or other industry sources.

“Any further changes to a rule that was thoroughly crafted should be based upon facts, not empty talking points,” the Senators wrote. “A decade on from the beginning of the financial crisis, now is not the time to roll back important Wall Street reforms and once again leave homeowners, consumers, and taxpayers vulnerable to more unnecessary Wall Street risk-taking.”

The full text of the letter follows below.

 

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September 7, 2017

 

The Honorable Steven T. Mnuchin

Secretary

Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

Dear Secretary Mnuchin:

We write to express our opposition to efforts to weaken the protections provided in the Volcker Rule and are concerned that the Office of the Comptroller of the Currency (OCC) is seeking public input on its notice to revise the Volcker Rule with the intent to do just that.[1]

During the financial crisis, high-risk trading strategies and hedge fund businesses created or exacerbated significant losses at a variety of large financial institutions. The investment bank Lehman Brothers, which owned an insured depository institution, invested heavily in mortgage-backed instruments, eventually pushing the institution into the largest bankruptcy in U.S. history.[2] Hedge funds sponsored by the investment bank Bear Stearns, which also owned an insured depository, also suffered massive losses on their collateralized debt obligation (CDO) portfolios, required bailouts from the parent company, and then ultimately failed.[3] While these failures occurred within the independent investment banks, large bank holding companies also took proprietary positions in, and sponsored investment funds invested in, risky products like synthetic CDOs and credit default swaps.[4] Other Wall Street banks took advantage of their clients, selling them products while simultaneously betting that those products would fail.[5]

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act responds to the lessons learned during the crisis by addressing risks associated with combining commercial banking and investment banking. It addresses inherent conflicts of interest and takes a step towards ensuring banking groups engage only in client-focused products and services and traditional activities like taking deposits and making loans. It is based on the simple premise that high-risk betting does not belong in or near institutions with access to the federal “safety net.”

This is a principle you echoed in January when you said, “the concept of proprietary trading does not belong in banks with FDIC insurance.”[6] We agree. That is why this provision was co-sponsored by more than one quarter of the United States Senate. It was also supported by five former Treasury Secretaries, the Independent Community Bankers of America, Nobel Prize-winning economists, and then-candidate Donald Trump. [7] Given this broad support, it is deeply troubling to witness this further breach of that trust by going back on those commitments.

As you know, Congress tasked five federal financial regulators to issue a joint rule to implement Section 619. Regulators spent three years drafting, seeking comment, and finalizing the rule. Given the role each of the five regulators play, coordination among the relevant regulatory agencies is critical. Any further changes to a rule that was thoroughly crafted should be based upon facts, not empty talking points.

There is little credible evidence that the Volcker Rule has harmed markets, or the economy. Preventing speculative bets has reduced volatility and, for those who have fully embraced its spirit of serving customers, has brought more, not less, stable profitability to the financial sector. The Volcker Rule is aimed at a goal that has broad support in Washington: focusing banks on making loans rather than risky proprietary bets. In that regard, it appears to be succeeding – in the first quarter of 2016, loans made by all federally insured institutions totaled $8,939 billion, a 7.0% increase over 2015.[8]

In fact, the Volcker Rule was implemented without compromising bank profits. The banking industry’s annual profits reached record highs in 2016,[9] when the industry’s net income was $171.3 billion, 4.9% more than in 2015.[10] Ten of the nation’s biggest lenders made $30 billion in the second quarter of 2017, just a few hundred million short of the record in the second quarter of 2007.[11] In 2017, the number of problem institutions, as defined by the Federal Deposit Insurance Corporation (FDIC), is down 88.12% since 2010.[12] Profits were $48.26 billion in the second quarter of 2017, up 10.72% from a year earlier.[13] As of June 2017, 95.9% of all insured financial institutions are profitable according to reports from the FDIC.[14]

Despite increased lending, record profits, and reduced systemic risks, some argue that the Volcker Rule should be dismantled because it reduces market liquidity. A recent Congressionally-mandated report by staff of the Securities and Exchange Commission found that there is scant evidence of any decline in liquidity in most markets, and in markets where changes have been observed, the evidence is inconclusive as to whether regulation is responsible.[15] This is consistent with prior findings by other impartial experts that the evidence regarding market liquidity is mixed, at best.[16]

Given the strong evidentiary basis for the Volcker Rule, and the lack of empirical evidence that it is causing any harm to the Main Street economy, we urge you to join us in rejecting this unnecessary, costly, and disruptive re-litigation of the final Volcker Rule. That a joint rulemaking has been reopened by an acting agency head who has never been confirmed by the United States Senate, and who only recently represented in private practice the very institutions he now regulates, is inappropriate. For these reasons, we request further information including:

  1. All external meetings that you or your staff have attended to discuss amendments to the Volcker Rule, including a list of attendees at each meeting; and
  2. All the data, reports, and studies you have collected, compiled, or received regarding the Volcker Rule, including any metrics you or your staff are evaluating. This should include any data and other information provided to you by the financial services industry and its representatives and the federal financial regulatory agencies.

A decade on from the beginning of the financial crisis, now is not the time to roll back important Wall Street reforms and once again leave homeowners, consumers, and taxpayers vulnerable to more unnecessary Wall Street risk-taking.



[1] “Notice Seeking Public Input on the Volcker Rule,” Office of the Comptroller of the Currency, August 2017, https://www.occ.gov/news-issuances/news-releases/2017/nr-occ-2017-89a.pdf.

[2] “The Financial Crisis Inquiry Report,” Financial Crisis Inquiry Commission, January 2011, at 177, 326-42, fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.

[3] Ibid, at 238-42.

[4] Ibid, at 379-82.

[5] “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Permanent Subcommittee on Investigations, United State Senate, 13 Apr. 2011, www.hsgac.senate.gov/download/report-psi-staff-report-wall-street-and-the-financial-crisis-anatomy-of-a-financial-collapse.

[6] Ryan Tracy, “Mnuchin’s Volcker Rule Comments Are a Break from Some Republicans,” The Wall Street Journal, January 19, 2016, http://www.wsj.com/livecoverage/wilbur-ross-tom-price-scott-pruitt-confirmation-hearings/card/1484845433.

[7] “Donald Trump: I Really Do Believe We’re Creating a Bubble,” Bloomberg Politics, August 4, 2015, https://www.bloomberg.com/news/videos/2015-08-04/donald-trump-i-really-do-believe-we-re-creating-a-bubble.

[8] “Statistics At A Glance,” Federal Deposit Insurance Corporation, 31 March 2016, https://www.fdic.gov/bank/statistical/stats/2016mar/industry.pdf.

[9] Ryan Tracy, “U.S. Banking Industry Annual Profit Hit Record in 2016,” The Wall Street Journal, 28 February 2017, https://www.wsj.com/articles/u-s-banking-industry-annual-profit-hit-record-in-2016-1488295836.

[10] Ibid

[11] Yalman Onaran, “U.S. Mega Banks Are This Close to Breaking Their Profit Record,” Bloomberg Markets, 21 July 2017, https://www.bloomberg.com/news/articles/2017-07-21/bank-profits-near-pre-crisis-peak-in-u-s-despite-all-the-rules.

[12] “Statistics At A Glance,” Federal Deposit Insurance Corporation, 30 June 2017, https://www.fdic.gov/bank/statistical/stats/.

[13] Ibid.

[14] Ibid.

[15] “Access to Capital and Market Liquidity,” United States Securities and Exchange Commission, August 2017, https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf.

[16] Stanley Fischer, “Is there a Liquidity Problem Post-Crisis?” Speech, Washington, DC, 15 November 2016, https://www.federalreserve.gov/newsevents/speech/fischer20161115a.htm.