Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, gave the following floor statement in opposition to H.R. 4790, the third bill on the House floor this week that would provide a giveaway to Wall Street megabanks. H.R. 4790 is the latest attempt by Republicans to weaken the Volcker Rule, a cornerstone of Wall Street reform that prevents banks from engaging in risky trading activities with taxpayer funds.
As Prepared for Delivery
Mr. Speaker, I would like to start off with a quote from Speaker Paul Ryan, who in a 2012 town hall meeting told his constituents, “If you’re a bank and you want to operate like some non-bank entity like a hedge fund, then don’t be a bank. Don’t let banks use their customers’ money to do anything other than traditional banking.”
I agree. That is why Congress passed the Volcker Rule in the wake of the 2008 financial crisis to prevent taxpayer-backed banks from engaging in risky, speculative activities like owning hedge funds.
But since that time, Republicans have engaged in a relentless attack against the Volcker Rule at the behest of Wall Street megabanks. H.R. 4790, the so-called Volcker Rule Regulatory Harmonization Act, is the latest threat to that rule. Specifically, H.R. 4790 contains two problematic provisions that would create a loophole in the Volcker Rule and make it easier for the Trump Administration to weaken or repeal it.
Leading up to the financial crisis, Wall Street megabanks engaged in “proprietary trading,” which is essentially speculative, highly-leveraged betting that benefits their bottom line, but uses federally-insured loans backed by the U.S. taxpayer. These banks gambled on exotic financial instruments like collateralized debt obligations comprised of risky, subprime mortgages and credit-default swaps, which even the legendary investor, Warren Buffett, criticized as “financial weapons of mass destruction.”
When the housing bubble finally burst, these bets led to massive losses and required the federal government to bail out the banking industry with trillions of taxpayer dollars to stop an economic catastrophe. To protect the American taxpayer and the economy from this sort of risky trading, as well as to return banks to the business of helping consumers and small businesses, Congress included the Volcker Rule’s ban on proprietary trading as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Specifically, the Volcker Rule prohibits taxpayer-backed banks from engaging in risky proprietary trading and from owning hedge funds and private equity funds. It also prohibits banks from owning the very same risky collateralized debt obligations that accelerated the 2008 crisis. According to Martin Gruenberg, the Chairman of the Federal Deposit Insurance Corporation (FDIC), which is the agency charged with protecting taxpayers from bank bailouts, “Had [this prohibition] been in place then, the Volcker Rule would have constrained the proliferation of such instruments.”
The result today is less reckless risk-taking by Wall Street megabanks and a stronger financial system. And, despite dire predictions by Republicans, our banks have returned to lending to consumers and businesses, and our financial markets are adapting and thriving. For example, since passage of Dodd-Frank, bank lending to businesses has increased 80%. In the bond market, which has long been dominated by bank dealers, we have seen record new bond issuances by companies, states, cities and towns seeking to raise funds and record trading volumes in those bonds. Most other metrics also show a healthy corporate bond market.
Nevertheless, H.R. 4790 is just the latest Republican attempt to weaken the Volcker Rule.
First, the bill would provide a blanket exemption from the Volcker Rule for 97% of our nation’s banks, which have consolidated assets of $10 billion or less and with less than 5% of those assets in trading assets. To be clear, most community banks do not engage in any trading activities and therefore have no compliance requirements under the rule. However, H.R. 4790 would give all community banks the Congressional thumbs-up to begin speculative trading instead of focusing on the traditional business of banking. It also makes community banks prime targets for hedge fund salesmen.
Now, why is this an area of concern for me? It’s an area of concern because I hear the community banks when they say that their numbers are going down because of mergers and consolidation.
This bill does not help with this problem. It makes it worse because it sends a shining beacon to hedge funds all over the country that they can peddle risky and questionable investments to community banks and the regulators will be none the wiser.
I am extraordinarily concerned with the extent of the affordable housing crisis our nation is facing. We need banks to invest in housing and in our communities. I believe that community banks can provide those kinds of investments but I am also concerned that if the hedge funds can prey on community banks with little oversight then they will be unable to provide the kinds of investments in housing, and small businesses that communities need. Instead, we’ll see more community banks investing in hedge funds and possibly leaving these communities behind. So, when Members ask how can we create more affordable housing or address the issues that experts like Dr. Matthew Desmond are raising on the housing crisis in America, one thing that we can do, is not think narrowly about the impact of financial services legislation, and particularly, legislation like H.R. 4790 that can create lasting unintended consequences if not carefully considered. We should think broadly and realize that the policies that we make for banks can have real impacts on the communities they serve.
And the regulators and experts have done just that – they have carefully considered the bill’s provisions and the unintended consequences that could ensue. That is why the blanket carve out in this bill is opposed by former Fed Chairman and the rule’s namesake, Paul Volcker, who has said “I know from my long experience in banking and savings and loan regulation that plausibly small loopholes can be ‘gamed’ and exploited with unfortunate consequences.” Paul Volcker was Chairman of the Fed for part of the savings and loan crisis, during which more than a thousand S&Ls failed, fully one third of the industry. The exemption is also opposed by FDIC Chairman Gruenberg, FDIC Vice Chairman Thomas Hoenig, and investor advocates. If we truly want to reduce regulatory burdens on community banks that engage in permitted trading activity, we should be looking at other ways to accommodate them, such as by creating a presumption of compliance with the Volcker Rule, which reduces compliance costs without opening up a loophole. Rather than encouraging banks, especially community banks, to make speculative bets on hedge funds or derivatives, we should be doing everything possible to ensure banks are focused on supporting their communities by offering mortgages and commercial loans.
Second, H.R. 4790 would repeal the requirement that the Federal Reserve, FDIC, Office of the Comptroller of Currency (OCC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) work together to jointly implement the rule. Instead, the bill would delegate sole rulemaking authority to the Federal Reserve, which could choose to consult or not consult with the other regulators. This would unreasonably cut the FDIC out of any future rule changes, even though it is the regulator charged with protecting deposit insurance against the very risky, speculative activities the Volcker Rule was designed to prevent. It would also cut the OCC out of the rulemaking process, even though it oversees institutions that account for approximately 40 percent of bank holding company trading revenues. And, it would cut out the SEC and CFTC, even though those agencies have the expertise and jurisdiction over broker-dealers and futures traders and their market making activities.
Worse, appointing the Fed as the sole regulator would make it easier for the Trump Administration to weaken and repeal the Volcker Rule even though it was expeditiously promulgated in two years and the regulators are now working together to make appropriate changes. While the bill would at least allow the appropriate banking regulators, SEC and CFTC, to enforce the rule, such enforcement authority is meaningless if the Volcker Rule is effectively gutted by the Trump Administration.
But this is what my Republican colleagues want. Chairman Hensarling’s 600-page big bank giveaway, H.R. 10, known as the Wrong Choice Act, would have repealed the Volcker Rule outright. H.R. 4790 is merely the latest attempt to do the same thing.
So I strongly oppose H.R. 4790. I reserve the balance of my time.