At a House Capital Markets, Securities and Investment Subcommittee hearing this week, several expert witnesses cited what they called the negative effects of the Dodd-Frank Act’s Volcker Rule on capital markets.
Named for former Federal Reserve Board Chair who initially proposed it, Paul Volcker, the Volcker Rule restricts banks from short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for banks’ own accounts. Volcker said these kinds of speculative investments do not benefit customers and played a key role in the financial crisis.
The Volcker Rule was enacted in 2015 as part of the Dodd-Frank Act.
Witnesses at the hearing said the rule harmed the ability of American businesses to obtain affordable financing for long-term growth.
“Hardworking Americans rely on the capital markets to save for everything from college to retirement,” Committee Chairman Bill Huizenga (R-MI) said. “We as Congress must act to eliminate the burdensome and unnecessary regulations such as the Volcker Rule to ensure the U.S. capital markets remain the deepest and most liquid so that all investors receive the greatest return on their investment.”
Opponents of the rule said it increases borrowing costs for businesses, lowers investment returns for households, and reduces economic activity overall because it constrains market-making activity.
“The challenge is not how much capital is raised, but the incremental cost to issuers of raising it – a cost that affects Main Street as much as it affects Wall Street. The result is costly regulation with limited upside and the potential for greater downside,” Charles Whitehead, a business law professor at Cornell University, said.
A repeal of the Volcker Rule will promote more resilient capital markets and a more stable financial system, witnesses said.
“Looking at the benefit side of the cost-benefit tradeoff, I believe there is little incremental benefit provided by the Volcker Rule,” Ronald Kruszewski, Stifel Financial Corporation chairman and CEO, said. “What about the cost side of this equation? Simply put, the Volcker Rule makes our capital markets less liquid which increases the cost of capital for [customers], especially smaller companies which are the major contributors to job-creation.”
David Blass, general counsel at Investment Company Institute, said the availability of liquidity is a critical element of efficient markets, particularly mutual funds. Banks are key participants in providing this liquidity, committing capital when needed by investors to facilitate trading.
According to a study released by the Federal Reserve staff December, “the net effect [of the Volcker Rule] is a less liquid corporate bond market [and has a] deleterious effect on corporate bond liquidity and dealers subject to the Rule become less willing to provide liquidity during stress times.”
Thomas Quaadman, executive vice president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, said the Volcker Rule has imposed a complex web of regulatory compliance on financial institutions.
“The Chamber opposed the Volcker Rule at the outset because of the foreseeable negative consequences of the rule, such as restricting market-making and underwriting activities, which in turn impact the ability of businesses to obtain the financing needed for short-term operations and long-term growth,” he said.
The Financial Choice Act, the Republican’s plan to replace Dodd-Frank, would repeal the Volcker Rule.