In a letter to Treasury Secretary Tim Geithner, Senator Orrin Hatch (R-UT) called for the delay of further implementation and rulemaking under the Dodd-Frank Act until the Senate is provided assurances that G-20 nations have agreed to adopt similar regulatory reforms. He is concerned that regulations implementing Dodd-Frank are being drafted without adequate consideration of the possibility that they will push financial activity to foreign financial institutions in jurisdictions that fail to adopt similar regulations. The Senator, who is the Ranking Member on the Finance Committee, specifically focused on regulations to implement the Volcker Rule and the implementation of the Consumer Financial Protection Bureau.
Senator Hatch posed a series of questions that he wants Treasury to answer by April 28. He wants to know whether any provisions of the Dodd-Frank Act are unlikely to become part of the international financial regulatory framework, and, if so, the reasons why. He also seeks details on any action the Administration has undertaken in furtherance of the International Policy Coordination section of the Dodd-Frank Act.
More broadly, the Senator wants information on whether the Administration believes that the failure of G-20 nations to adopt similar provisions to Dodd-Frank will place US financial institutions at a competitive disadvantage with their foreign competitors. In that vein, he asks if any formalized consultations have occurred with G-20 nations regarding implementation of provisions and principles included in the Dodd-Frank Act, specifically mentioning the Volcker Rule in that regard. The Senator asks for the dates by which the Administration believes the G-20 nations will formally adopt and implement provisions akin to the Volcker Rule.
House Financial Services Chair Spencer Bachus (R-AL) has expressed similar concerns.
In a letter to the Financial Stability Oversight Council, which Treasury chairs, Chairman Bachus said that any Volcker Rule regulations adopted by US financial regulators must be set against the international regulatory framework so as not to foster regulatory arbitrage. In the view of Chairman Bachus, the Volcker provisions collide with the European universal banking model that the EU is unlikely to abandon in the spirit of regulatory harmonization. More specifically, given the City of London’s significance as a world financial center, noted the Chair, the UK’s failure to adopt the Volcker provisions would result in a significant competitive disadvantage for US firms.
In an action that may give the two legislators some comfort, a UK commission proposed that the retail banking activities of a financial institution be ring-fenced from the firm’s investment banking activities. The ring-fencing proposal shares a common motivation and underlying philosophy with the Volcker Rule in that they both aim to curtail government guarantees and the instability they can create by subsidizing risk taking.
In his letter to Treasury, Senator Hatch said that Dodd-Frank contained provisions requiring or allowing federal rulemaking through the newly created Consumer Financial Protection Bureau. He has real concerns that a lack of due diligence in the implementation of Dodd-Frank will result in unduly burdensome regulations that will undermine the competitiveness of the domestic financial industry, putting the US at odds with its global trading partners and placing further strain on an already stressed corporate tax structure.
The Senator cited a recent report from analysts at the British investment branch of JPMorgan Chase highlighting the anti-competitive impact of these regulations. The authors agreed with the views expressed by some members of the Senate on the potential negative impact that the restrictions on market making related activities rules might have on the competitiveness of the U.S. financial services sector. While Senator Hatch supports well-reasoned efforts to strengthen the financial system, he fears that the rushed implementation of Dodd-Frank could cripple US financial institutions by making them uncompetitive and less able to provide the vital services imperative to a sustained economic recovery.