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Limiting Federal Support for Financial Institutions S. HRG. 112–679 IS SIMPLER BETTER? LIMITING FEDERAL SUPPORT FOR FINANCIAL INSTITUTIONS HEARING BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION OF THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS SECOND SESSION ON EXPLORING POLICIES TO FURTHER LIMIT FEDERAL SUPPORT FOR LARGE, COMPLEX FINANCIAL INSTITUTIONS MAY 9, 2012 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.fdsys.gov/ U.S. GOVERNMENT PRINTING OFFICE 77–865 PDF WASHINGTON : 2013 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS TIM JOHNSON, South Dakota, Chairman JACK REED, Rhode Island RICHARD C. SHELBY, Alabama CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee DANIEL K. AKAKA, Hawaii JIM DEMINT, South Carolina SHERROD BROWN, Ohio DAVID VITTER, Louisiana JON TESTER, Montana MIKE JOHANNS, Nebraska HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania MARK R. WARNER, Virginia MARK KIRK, Illinois JEFF MERKLEY, Oregon JERRY MORAN, Kansas MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi KAY HAGAN, North Carolina DWIGHT FETTIG, Staff Director WILLIAM D. DUHNKE, Republican Staff Director LAURA SWANSON, Policy Director JEFFREY SIEGEL, Senior Counsel DAWN RATLIFF, Chief Clerk RIKER VERMILYE, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION SHERROD BROWN, Ohio, Chairman BOB CORKER, Tennessee, Ranking Republican Member JACK REED, Rhode Island JERRY MORAN, Kansas CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey MIKE JOHANNS, Nebraska DANIEL K. AKAKA, Hawaii PATRICK J. TOOMEY, Pennsylvania JON TESTER, Montana JIM DEMINT, South Carolina HERB KOHL, Wisconsin DAVID VITTER, Louisiana JEFF MERKLEY, Oregon KAY HAGAN, North Carolina GRAHAM STEELE, Subcommittee Staff Director MICHAEL BRIGHT, Republican Subcommittee Staff Director (II) CONTENTS WEDNESDAY, MAY 9, 2012 Page Opening statement of Chairman Brown ................................................................ 1 Opening statements, comments, or prepared statements of: Senator Corker .................................................................................................. 1 Senator Merkley ............................................................................................... 2 WITNESSES Paul A. Volcker, Chair, President’s Economic Recovery Advisory Board, and former Chairman, Board of Governors of the Federal Reserve System .......... 2 Prepared statement .......................................................................................... 37 Thomas M. Hoenig, Vice Chairperson and Member of the Board of Directors, Federal Deposit Insurance Corporation ............................................................. 14 Prepared statement .......................................................................................... 40 Randall S. Kroszner, Professor of Economics, University of Chicago, Booth School of Business ................................................................................................ 15 Prepared statement .......................................................................................... 54 Tom C. Frost, Chairman Emeritus, Frost National Bank ................................... 25 Prepared statement .......................................................................................... 61 Marc W. Jarsulic, Chief Economist, Better Markets ............................................ 26 Prepared statement .......................................................................................... 62 James E. Roselle, Executive Vice President and Associate General Counsel, Northern Trust Corporation ................................................................................ 28 Prepared statement .......................................................................................... 89 Anthony J. Carfang, Partner and Director, Treasury Strategies, Inc., on be- half of the U.S. Chamber of Commerce .............................................................. 30 Prepared statement .......................................................................................... 91 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Thomas M. Hoenig speech presented to the European Banking and Financial Forum in Prague, 1999 ........................................................................................ 130 Prepared statement of Wallace C. Turbeville, Senior Fellow, Demos ................. 139 Federal Reserve Bank of Dallas 2011 Annual Report .......................................... 163 (III) IS SIMPLER BETTER? LIMITING FEDERAL SUPPORT FOR FINANCIAL INSTITUTIONS WEDNESDAY, MAY 9, 2012 U.S. SENATE, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee convened at 2:03 p.m. in room 538, Dirksen Sen- ate Office Building, Hon. Sherrod Brown, Chairman of the Sub- committee, presiding. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. The Subcommittee on Financial Institutions and Consumer Protection will come to order. I thank Senator Corker for, always, his cooperation. Senator Merkley, thank you for joining us. Mr. Volcker, nice to see you. We have three panels today. Opening statements, I always give moderately short ones. It will be even shorter today, and Senator Corker always gives thoughtful and even shorter statements, so we will begin briefly with that. I want to thank everybody involved for helping pull together this important hearing. Getting such excellent and qualified individuals to discuss such an important but, admittedly, broad set of topics was not easy, so I appreciate the cooperation of all of you who are major players in your own right throughout our financial system. As I said, I will keep my message brief. I would simply say it is vital we take the necessary steps sooner rather than later to end Government policies that support and encourage large, complex in- stitutions. That is why today I am introducing my legislation, the SAFE Banking Act. It was known formerly as the Brown-Kaufman bill and amendment. The ideas we will explore today have traction on both sides of the aisle. For instance, we know that the full Com- mittee’s Ranking Member, Senator Shelby, voted both against the Gramm-Leach-Bliley Act and in favor of Brown-Kaufman when it was an amendment to the Dodd-Frank bill. And thanks again to the witnesses. Senator Corker, your comments. STATEMENT OF SENATOR BOB CORKER Senator CORKER. Thank you, Mr. Chairman, and Dr. Volcker, thank you for being here. I enjoyed talking to you prior to and I enjoyed reading your testimony yesterday evening as it came in. (1) 2 I think we all agree that we need a safe banking system and we want one that also meets the needs of a 21st century economy, and that is the balance, I think, that we are all looking for. I want to thank you, in particular, in your testimony for pointing to the fact that Congress still has not dealt with the GSEs, and I know as a man who was under extreme stress during the early 1980s and made a lot of tough decisions that have caused you to be highly honored by people all across this country, you must look at amazement on a U.S. Congress that fails to deal with an evident huge problem in our country but has lacked the courage to deal with that. So I appreciate you pointing that out. I was thinking as we read a lot of materials getting ready for this hearing, and I certainly appreciate all the witnesses that have come, you know, the most dangerous thing that a bank does is make a loan. At the end of the day, without sound underwriting, all the things that we do here do not make a lot of sense. But I sure thank you for your testimony. I look forward to hear- ing it orally and then the questions, and we are honored to have you here. Senator BROWN. Thank you. Thank you, Senator Corker. Senator Merkley. STATEMENT OF SENATOR JEFF MERKLEY Senator MERKLEY. Thank you, Mr. Chair. Just very briefly, welcome. It is so good to have you, Mr. Volcker, and for your leadership in helping establish the concept that there needs to be a firewall between ordinary banking activities and hedge fund-style investment activities by banks in order to create a safer and sounder banking system. I certainly look forward to your comments. Thank you. Senator BROWN. Thank you, Senator Merkley. Our first panelist, and I do not normally do cliches, but he is a man who needs no introduction. I appreciate so much Chairman Volcker joining us. He has dedicated his life to ensuring, as Sen- ator Corker said, the American financial system is safe and sound, first as President of the Federal Reserve Bank of New York and as the Chair of the Board of Governors of the Federal Reserve System. Through your efforts, Dr. Volcker, to reform our financial system, though they may have frustrated some bankers on Wall Street and some lobbyists in Washington, there is no doubt our country is a better place because of your hard work. Thank you for your decades of service. You have the floor. STATEMENT OF PAUL A. VOLCKER, CHAIR, PRESIDENT’S ECO- NOMIC RECOVERY ADVISORY BOARD, AND FORMER CHAIR- MAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE
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