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Agencies Failing to Follow Law on Key Financial Regulation

The Dodd-Frank Act of 2010 is one of the worst pieces of legislation to have become law in recent history. It created the Consumer Financial Protection Bureau as an independent government unto itself, unaccountable to the president, Congress or the American people. Another provision, the Durbin amendment, was meant to save consumers money, but ended up costing those with a checking account an estimated $8 billion in additional fees. Dodd-Frank also claimed that it would solve the problem of “too big to fail” banks, but only ended up making the largest banks bigger.

One of several reasons Dodd-Frank made the problem of “too big to fail” worse is by imposing regulations on all banks that only large banks could afford to comply with. Compliance with many regulations raises an institution’s fixed costs, which can more easily be afforded by bigger banks. Without the ability to compete, smaller banks were forced to consolidate with larger institutions, increasing the relative size of the already large banks.

One of the largest burdens on banks imposed by Dodd-Frank is the Volcker Rule. This was intended to prohibit the “risky trading” of a bank’s own money on the fear that risky investments could cause the bank to fail. According to the Government Accountability Office, however, this is not what caused the 2008 crisis. The Volcker Rule prohibited almost all investments except for very narrow exceptions and required extensive procedures and measures by banks to ensure compliance.

One major problem with the Volcker Rule is its complexity. For example, banks often have to hedge investments to reduce the risk to themselves and their customers. Hedging is allowed under the Volcker Rule, but the difference between hedging and proprietary trading, which is prohibited, can be hard to prove without a lot of time and money spent.

After Dodd-Frank was implemented, people began to see the problems it was causing. For instance, when President Trump was running for office he said, “We have to get rid of Dodd-Frank. The banks aren't loaning money to people that need it… The regulators are running the banks.” After Trump was inaugurated, one of his first acts as president was to order the Treasury Department to re-examine federal financial regulations.

The Treasury Department responded by suggesting that the Volcker Rule be eliminated for those banks with under $10 billion in assets, and limited for those above $10 billion but with few trading assets. Meanwhile, the House of Representatives had just voted to abolish the Volcker Rule entirely under the Financial CHOICE Act. It was at this time that the Senate began considering another piece of legislation, the Economic Growth, Regulatory Relief, and Consumer Protection Act or S. 2155. This bill mostly followed Treasury’s suggestion to apply the Volcker Rule only to banks with more than $10 billion in assets and a substantial percentage of trading assets. That legislation was signed into law last year.

One thing that made it confusing, however, is that the language dealing with the Volcker Rule in S. 2155 includes a double negative. It states that the regulated banks are not those that do not have more than $10 billion in assets and more than 5% trading assets.

Five different financial regulatory agencies are now writing joint regulations to implement the law, but they mangled the statutory language. The proposed regulations negated half of the statutory language, but without changing the conjunction to a disjunction. This effectively means that rather than requiring only banks with more than $10 billion in assets and more than 5% trading assets to be subject to the Volcker Rule, either will cause the bank to be subject to the Volcker Rule.

The Competitive Enterprise Institute filed comments and led a coalition letter of 13 conservative and free-market groups yesterday in response to the flawed proposed rule. We informed the five regulatory agencies that the proposal is contrary to the statute that they are meant to be implementing.

The difference between the two interpretations is significant. If this regulation is finalized, hundreds of additional banks will be subject to this unnecessary rule, contrary to Congressional intent and further burdening our financial system. These kinds of heavy handed regulations should not be applied to smaller banks or those that do very little trading.

It is now up to the five regulatory agencies to do the right thing: implement the Volcker Rule reforms contained in S. 2155 as written and alleviate many of the nation’s banks from this burdensome regulation.