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Statement Regarding Adoption of Rule Implementing the Volcker Rule

Commissioner Kara M. Stein

Dec. 10, 2013

I am pleased that the Securities and Exchange Commission (SEC) will today join its fellow federal financial regulators in finalizing important protections against the risks and conflicts of interest inherent in banks’ proprietary trading and relationships with hedge funds and private equity funds. 

This has truly been a team effort.  I would like to congratulate the SEC team, which includes John Ramsay, Jim Burns, Gregg Berman, Angela Moudy, Josephine Tao, Caite McGuire, Jennifer Palmer, Lisa Skrzycki, Norm Champ, Diane Blizzard, Dan Townley, Jane Kim, Brian Johnson, Marian Fowler, Amy Starr, Katherine Hsu, and David Beaning for their great work in getting this rule done.  I also would like to thank Chair White’s staff, including Liban Jama, Jennifer McHugh, and Nathaniel Stankard for working with me and my counsels, Ty Gellasch and Michael Spratt, so intensively for these past several months.  Finally, I would like to thank the superb staff of the other federal financial regulators, as well as the thousands of commenters, who have helped get us to this point.  Drafting this rule has not been easy, but it has been important work.  Our financial system and our economy will be safer because of all of your efforts. 

Eighty years ago, in the aftermath of the Great Depression, Congress passed the Glass-Steagall Act to erect a wall between the commercial banking system and the securities and insurance businesses.  This wall worked fairly well for over 50 years.  Then, over time, many began to question why that separation existed.    The world had changed and become more interconnected and global.   Many said that the wall was no longer needed. 

So, amidst a broader deregulatory push, the Glass-Steagall Act was slowly chipped away.  As chunks of the wall separating commercial banking from other financial services were removed, nothing bad seemed to happen.  Emboldened, regulators continued to dismantle the wall until Congress was ultimately asked to finish the job.  Finally, in November 1999, Congress removed the last vestiges of the wall with the passage of the Graham-Leach-Bliley Act.  The new era of the universal bank was born.

Some predicted disaster.  But those cautionary voices were drowned out by the overwhelming cries for unfettered competition and financial innovation.  Fewer than ten years later, the doomsayers were proven right.  The financial crisis and the Great Recession that followed cost millions of Americans their jobs and their precious retirement funds.  Despite trillions of dollars in government bailouts of the largest financial firms, the crisis and recession ultimately have cost Americans an estimated 13-22 trillion dollars.  The enormity of this financial devastation has been overwhelming, even to those who have sought to estimate the costs of the damage.

In the aftermath of this economic wreckage, Paul Volcker, the former Chairman of the Federal Reserve Board of Governors, proposed that regulators restore protections against the risks posed by banks’ proprietary trading and conflicts of interest.  President Obama agreed, and urged Congress to include what became known as the “Volcker Rule” in its financial regulatory overhaul.  Senators Jeff Merkley and Carl Levin drafted the statutory language for the Volcker Rule, and a majority of the members of the House of Representatives and the Senate joined together in adopting it.  The rule we are adopting today to implement that statute is the result of much thought and hard work. 

Some have suggested that we should second-guess Congress’ clear direction by engaging in our own analysis of the potential, theoretical impacts of this rule.  Congress has spoken on this point.  Congress decided to draft the rule as an amendment to the Bank Holding Company Act.  Congress also could have amended the Securities Exchange Act, which would bring with it a set of analyses.  It did not.  Rather, Congress elected to direct all five agencies tasked with rulemaking authority to adopt the rule pursuant to the Bank Holding Company Act.  Although Congress did not yet know how costly the Great Recession would be at the time it passed the law, Congress nevertheless determined that the Volcker Rule was necessary to help prevent another economic catastrophe.  We cannot and should not seek to overrule that judgment, nor should we seek to undermine or shirk our statutory obligation to faithfully implement this Congressional directive.

I think it is also worth mentioning that while all of the regulators today are adopting the same rule, such joint action is not necessarily required by the statute.  Rather, the statute, while it requires coordination, consistency, and comparability, also allows for the banking regulators to adopt one rule, the Commodity Futures Trading Commission to adopt another version, and the SEC to adopt yet another.  While all five regulators have separately and reasonably determined that it makes the most sense to proceed with a consistent rule, Congress expressly granted authority to the banking and financial markets regulators to implement the rule in a manner that is faithful to their statutory mission.

Some have argued that this rule will unnecessarily restrict the provision of financial services to the American families and businesses that currently rely on banks to provide them.   These concerns are belied by the fact that families and businesses received those services from numerous and diverse financial services providers during the period when the Glass-Steagall Act was in effect, and the US economy grew to be the strongest in the world.  In addition, Congress did not simply re-adopt the Glass-Steagall Act.  Rather, it decided to restore and provide new protections to cover activities like derivatives trading, while still permitting banks to provide certain customer-centered financial services.  However, these permitted activities, such as market making and underwriting, are to be subject to restrictions and limitations intended to ensure that they do not give rise to significant risks to the banking entities or the financial system. 

In the months and years ahead, I expect the SEC and the other financial regulators to continue to provide guidance to market participants and to refine these protections.  With our efforts today, we are taking a critical step towards protecting American families and businesses from unnecessary and inappropriate conflicts of interest and proprietary trading gone awry.  If these protections, as they may be refined over time, aren’t adequate to fulfill that objective because of legal challenges or other work-arounds, then it will be up to us as regulators to consider more clear, bright-line alternatives going forward.  The American people deserve no less.

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