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Thursday, May 10, 2012

Volcker Testifies on Regulatory Changes

Former Federal Reserve Board Chairman Paul Volcker sought yesterday to defend the Dodd-Frank Act rule bearing his name, saying its “impact on the sheer size of the largest U.S. commercial banking organizations and the activities of foreign banks in the United States may be limited [but are] an important step to deal with risk, conflicts of interest, potentially compensation practices and, more broadly, the culture of banking institutions.”

Testifying at a hearing before the Senate Banking Financial Institutions Subcommittee, Volcker dismissed various concerns, including that the rule would result in reduced liquidity, is overly complex, and would be difficult to enforce.

“It is important that the management of the banks… do understand what the law says. And the law says ‘no proprietary trading.’ All banks will have strong controls in the trading desks, in their own interests,” he said in response to a question from Sen. Bob Corker (R-TN).

Addressing a question on the Volcker Rule’s effects on liquidity, he stated that “if the markets are too liquid, it can give rise to behavior that is not very useful in terms of the basic business of banking or the financial markets generally.”

Volcker also covered several other issues involving regulatory changes, including referring to the mortgage market as “one very large part of American capital markets calling for massive structural changes that so far has not been touched by legislation.”

“We simply should not countenance a residential mortgage market, the largest part of our capital market, dominated by so-called Government Sponsored Enterprises,” he said.

Read more on the hearing.

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