Tags: TruPS | House | CLO | bank

House Committee Renews Assault on Volcker Rule

By    |   Wednesday, 12 February 2014 06:58 AM

The House Financial Services Committee, chaired by Jeb Hensarling, R-Texas, held a hearing Feb. 5 titled "The Impact of the Volcker Rule on Job Creators — Part II."

Witnesses were the heads of the financial regulatory agencies that together issued the rule in December, roughly 3 ½ years after the enactment of the Dodd-Frank Act. A threshold question to ask might be, just who are these job creators who are supposed to be harmed by the Volcker rule? Last year an entrepreneur who testified before the Senate Banking Committee sought to set the senators straight that he strives to create as few jobs as possible in every enterprise he sponsors.

In his opening remarks, Hensarling cited Volcker himself and former Treasury Secretary Tim Geithner as saying that the proprietary trading the Volcker rule would restrict did not cause the 2008 crisis, and Hensarling added that "without risk there is less investment and fewer job opportunities" (sic), skating past the issue of who is taking the risk when banks enter into risky trades with the backing of the federal safety net.

This hearing turned out to be bad political theater for at least three reasons. First is the question of whether the argument from job creation has any merit or whether it is just a shield the banking lobby is using in order to fend off overdue regulation.

Second was the spectacle of the five regulators repeating essentially identical statements. Toward the end of the panel, FDIC Chairman Martin Gruenberg acknowledged that everything had been said, so he promised to be brief. Then he, too, made a full, practically identical statement.

Finally, when the time came for the committee members to question the witnesses, they shamelessly repeated the same questions as many as 10 or 12 times, presumably for client consumption.

The theme of the hearing, raised repeatedly by members on both sides, is that financial regulators have unfairly applied the Volcker rule against a device commonly used by community banks to manage their balance sheets in a manner that bolsters their stated capital. One is the so-called trust preferred security (TruPS) and the other is collateralized loan obligations (CLOs), which are used to back the TruPS.

Regulators have ruled that because they are backed by debt, TruPS should not be considered capital, and banks have been given a period of years to phase them out.

Proponents of the CLO argue that it enables companies that do not have access to the capital markets in their own right to get access to funding, and they argue further that these instruments performed well during the 2008 episode. (Perhaps the companies whose debts compose the CLOs are the "job creators.")

Critics and some regulators point to the fact that the debtor companies aren't qualified to issue the securities directly. Therefore, if liquidity should dry up, both the companies and the banks could become insolvent.

Already these TruPS are under water by an average 10 percent, and accounting rules call for them to be written down. One bank in Kentucky complains that application of this rule threatens its already weak capital position. Instead of taking the blame for entering into these dodgy arrangements, community bankers are blaming the regulators.

The regulators have already delayed enforcing the rule, but the committee is demanding that regulators back off completely. This is yet another example of congressional opposition to implementation of the three-year-old Dodd-Frank Act.

(Archived video, witness statements, and the staff memorandum can be found here.)

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The House Financial Services Committee, chaired by Jeb Hensarling, R-Texas, held a hearing Feb. 5 titled "The Impact of the Volcker Rule on Job Creators — Part II."
Wednesday, 12 February 2014 06:58 AM
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