Trump-Appointed, Banker-Heavy FDIC Board Votes to Gut Volcker Rule

Trump Administration Lets Big Banks Go Back To Making Risky Bets with Other People’s Money

Washington D.C. – The Trump administration is rolling back the clock to let big banks get away with the same casino-like behavior with their customers’ money that led to the financial crisis ten years ago. Today, the 4-member FDIC board voted to defang the Volcker Rule, a key post-crisis reform that restricts banks from mixing their publicly insured commercial banking activities with speculative capital markets trading and other activities like hedge funds and private equity funds that present conflicts of interest with their customers. Calling the move a giveaway to their old banking friends, consumer watchdog group Allied Progress called attention to the fact that half of the Trump-appointed board is made up of former banking industry insiders including its Chair Jelena McWilliams, who worked For Fifth Third Bancorp, an opponent of the Volcker Rule.

“It’s no coincidence the administration is tearing down this important firewall between the interests of banks and their customers after the financial industry complained it’s keeping them from maximizing profits. This is what happens when a President put bankers in charge of banking regulations,” said Jeremy Funk, spokesman for Allied Progress.

Added Funk: “We know what happens when banks are allowed to use their customers’ savings and retirement money to place incredibly risky bets in places like shadowy derivatives markets and on other toxic assets. Those bets inevitably go bust and taxpayers – not the banks – are left holding the bag. The Volcker Rule has worked to prevent a repeat of history by keeping working families’ nest eggs from being tied up in dice-throwing games on Wall Street. But the Trump administration – which has already proposedeliminating or weakening over 300 financial industry regulations – would rather play with fire when it comes to the stability of the financial system. Congress must restore these critical consumer financial protections before serious damage is done.”

WHAT YOU NEED TO KNOW:

Trump Administration Lets Bankers Rewrite Rules For Their Former Colleagues

The New Rule Is Expected To Give Banks The Benefit Of The Doubt When It Comes To Determining Whether They Are In Compliance With Restrictions On Proprietary Trading.

The New Volcker Rule Is Expected To Give Banks The Benefit Of The Doubt That They’re In Compliance With The Volcker Rule, Rather Than Require Them To Demonstrate It. “In creating the rule named for former Fed Chairman Paul Volcker, who championed the idea, Congress and the regulators banned short-term trades that couldn’t be shown to meet exemptions for things such as hedging or market-making. The rule has assumed that trades are banned unless banks show they aren’t. The new version is expected to upend that by generally giving banks the benefit of the doubt that they’re in compliance, the people said. Regulators have said they expect to have more confidence that banks are abiding by the rules because the standards will be clearer, allowing firms to plan portfolios with more certainty.” [Jesse Hamilton and Benjamin Bain, “Volcker Revamp to Ease Banks’ Trading Rules, Path to Investments,”Bloomberg, 08/13/19]

  • The Agencies Have Reportedly Decided To Change The Rule “Without Re-Proposing” It And Seeking Public Comments. “They agencies have chosen to implement the changes without re-proposing the rule and seeking comment, according to three of the people, a step that could open the process to legal challenges.” [Jesse Hamilton and Benjamin Bain, “Volcker Revamp to Ease Banks’ Trading Rules, Path to Investments,”Bloomberg, 08/13/19]

The FDIC Board That Voted On The Rule Has Four Members, Including Two Former Bankers And The Anti-Consumer CFPB Director Kathy Kraninger.

The Current FDIC Board Has Four Members, Including: Chair Jelena McWilliams, Comptroller Of The Currency Joseph Otting, and CFPB Director Kathy Kraninger.

[“Board of Directors,” Federal Deposit Insurance Corporation, accessed 08/14/19]

Prior to Her Appointment As FDIC Chair, Jelena McWilliams Worked For Fifth Third Bancorp, An Opponent Of the Volcker Rule.

Jelena McWilliams Came To The FDIC From Fifth Third Bancorp, Where She Served As Chief Legal Officer. “Ms. McWilliams comes to the FDIC from Cincinnati-based Fifth Third Bancorp, where she was chief legal officer. She is also likely to weigh in on several other efforts already under way, including plans to revise the Volcker rule, a provision of the 2010 Dodd-Frank Act that prohibits banks from making risky bets with their own money. The Fed is set to meet next week to propose easing aspects of the rule. Four other agencies, including the FDIC, are also expected to seek modifications to it.” [Andrew Ackerman and Lalita Clozel, “Senate Confirms FDIC Nominee Jelena McWilliams,” The Wall Street Journal, 05/24/18]

  • In 2012, Fifth Third Bancorp Signed A Letter Opposing The Volcker Rule. “You can add Fifth Third Bancorp to the growing list of banks criticizing the so-called ‘Volcker Rule’ that bans banks’ proprietary trading and limits their investments in hedge funds and private equity. Fifth Third (Nasdaq: FITB) is one of eight regional banks that sent a letter on Monday to the Federal Reserve and other regulators arguing that the rule, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, will have the unintended consequence of hurting other banks’ ability to do business.” [Steve Watkins, “Fifth Third signs letter to Fed protesting Volcker Rule,”Cincinnati Business Courier, 02/15/12]

Prior to His Appointment As Comptroller of the Currency, Joseph Otting Worked For OneWest Bank.

Joseph Otting Became CEO Of The “Newly Formed” OneWest In October 2010 After The Bank Acquired IndyMac From The FDIC. “The Federal Deposit Insurance Corp. sold the failed IndyMac to a newly formed federal savings bank, OneWest, which was looking for a CEO. Otting saw the open position as an opportunity to move up as well as to help the Los Angeles area. ‘We wanted to make a hometown bank,’ Otting said. ‘Bankers are dream makers. We all have a responsibility to help our communities.’ He joined OneWest in October 2010. The bank had 82 locations with total assets of $28 billion, according to a statement from the company at the time.” [Wade Tyler Millward, “Man who oversees country’s biggest banks lives in Las Vegas,” Las Vegas Review Journal, 05/05/18]

CFPB Director Kathy Kraninger Has Refused To Say Whether Her Agency – With An Explicit Mission Of Protecting Consumers – Should Even Exist.

During A March 2019 Hearing Of The House Financial Services Committee, Kathy Kraninger Refused To Explicitly State That The CFPB Is Needed When Questioned By Rep. Rashida Tlaib (D-MI). Rep. Tlaib:Do you believe that we even need the bureau at all? Kathy Kraninger:I absolutely believe consumer protection is a responsibility of the federal government and as I said, Congress created the Bureau to that end. [“Putting Consumers First? A Semi-Annual Review of the Consumer Financial Protection Bureau,” House Financial Services Committee, 03/07/19 (2:44:13)]

In Response To Written Questions Around Her Nomination, Kathy Kraninger Refused To Directly State Whether Or Not She Believes The CFPB Is Constitutional As Currently Structured. Question: “Do you believe the CFPB is constitutional in its current form? If you do not please explain why you or anyone else should be confirmed to a position that you believe is not appropriately accountable to Congress or the President, or may be unconstitutional.” “Response: While this is an important question, the ultimate question of the constitutionality of the Bureau’s structure is one for Congress or the courts to resolve. The Director of the Bureau has a responsibility to carry out the law as it is written, and run the agency consistent with various legal requirements and binding court precedent. That will be my focus.” [“Questions for Ms. Kathleen Laura Kraninger, Director-Designate, Bureau of Consumer Financial Protection, on behalf of Ranking Member Brown, Senator Jack Reed, Senator Robert Menendez, Senator Elizabeth Warren, Senator Brian Schatz, Senator Chris Van Hollen” US Senate Committee on Banking, Housing, and Urban Affairs, 07/19/18]

The Volcker Rule Was Designed To Force Banks To Focus On Customer-Facing Activities Rather Than Making Risky Wall Street Bets Using Customer Funds – And It Has Worked.

The Volcker Rule Was Created To Eliminate Conflicts Of Interest At Major Banks – They Would No Longer Be Able To Use Customer Funds For Risky Investments That Pad Their Own Bottom Line.

The Volcker Rule Was Meant To Prevent Banks From Using Customer Funds To Enrich Their Proprietary Financial Portfolios. “The Volcker Rule was meant to address a problem first raised by former Federal Reserve Chairman Paul Volcker in the wake of the 2008 financial crisis: that there was nothing to prevent banks from using customers’ government-backed funds to enrich their proprietary portfolios. His solution — and the one that was ultimately adopted into Dodd-Frank — was to eliminate those portfolios, thus eliminating any conflict of interest.” [John Heltman, “How a Volcker Rule rewrite could backfire,” American Banker, 08/13/19]

The Volcker Rule Is Designed To Ensure “That Banks With Access To The Federal Safety Net […] Are Oriented Toward Client-Focused Activities That Bolster The Real Economy” And Not Risky Speculative Trading For Profit. “The [Volcker Rule] bans banks and their affiliates from engaging in proprietary trading—highly risky speculative trading for their own profit—and severely restricts their ability to own, invest, or sponsor hedge funds and private equity funds. It also targets conflicts of interest and places restrictions regarding these highly risky activities on certain nonbank financial institutions, which are designated as systemically important by the Financial Stability Oversight Council. The Volcker Rule essentially ensures that banks with access to the federal safety net—namely the Federal Reserve’s discount window and federal deposit insurance—are oriented toward client-focused activities that bolster the real economy, which actually produces goods and services.” [Gregg Gelzinis, “Hollowing Out the Volcker Rule,” Center for American Progress, 10/03/18]

Experts Suggest That The Rule Is Working As Intended While Bankers’ Main Complaint Being That Compliance Has Been Cumbersome And “Hurts Profits.”

The Volcker Rule “Appears To Be Working” And “Has Significantly Limited The Type Of Activity It Was Meant To Curtail.” “The surprising thing is that despite all the loopholes, Volcker actually appears to be working. It has significantly limited the type of activity it was meant to curtail. Banks have been ramping up their trading risk a bit lately, but it is still way down from what it was before Dodd-Frank. Most banks largely eliminated their prop-trading divisions a few years ago, and there’s no indication they are coming back, even under the Trump administration’s lighter touch. That could be in part because investors want banks to be less risky, but it’s hard not to give Volcker some credit as well.” [Stephen Gandel, “Volcker Rewrite Only Widens Existing Loopholes,Bloomberg, 05/15/18]

Bankers Have Privately Admitted Their Main Concern With The Volcker Rule Has Been That “Complying With The Rule Is Very Cumbersome And That It Hurts Profits.” “An analysis published last year by the Securities and Exchange Commission that focused on how financial markets have changed over the past decade found that liquidity in parts of the bond market has actually improved since Volcker took effect. Trading costs declined and volumes rose. Privately, bankers admit as much. Current and former executives, traders, risk managers and lobbyists of the five largest United States banks, including people responsible for overseeing large trading businesses, said in interviews that the rule had neither starved market participants of trading options nor undermined the stability of the markets. The banks’ real concern is that complying with the rule is very cumbersome and that it hurts profits.” [Emily Flitter and Alan Rappeport, “Bankers Hate the Volcker Rule. Now, It Could Be Watered Down.,”The New York Times, 05/21/18]

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