WASHINGTON Members of the House Financial Services Committee grilled chief lawyers from the banking agencies on Tuesday, airing a wide range of grievances, including some related to a temporary Volcker Rule exemption and a Department of Justice crackdown on the payday loan industry.
Republicans and some Democrats were quick to raise concerns about regulators' decision on Monday to give banks two additional years to bring their collateralized loan obligations in compliance with the Volcker Rule, arguing that the delay falls short of solving the problem.
"The conformance period extension may minimize the pain, but it certainly does not eliminate it," said Rep. Peter King, R-N.Y.
The response mirrors that from the industry, with several trade groups announcing that they also continue to have concerns about the CLO provision.
"We are disappointed that the agencies involved did not use their rulemaking authority to provide broad relief from the Volcker Rule to legacy CLOs," said Kenneth Bentsen, Jr., president and chief executive of the Securities Industry and Financial Markets Association, in a statement. "SIFMA strongly believes that regulators should have addressed the problem in a comprehensive, coordinated, and conclusive manner yet the statement released today seems to suggest the Agencies have taken a different approach."
But Scott Alvarez, general counsel at the Federal Reserve, defended the move, emphasizing that the CLO problem is concentrated in the hands of just a few institutions and should be adequately mitigated by the two-year extension.
"Of the 6,800 banks in the United States, something like 50 banks report that they own CLOs, and of those 50 banks, a handful of the very, very largest in this country own something like 90% of the CLOs," he said. "This is largely a problem that is concentrated with a small number of very large institutions."
Alvarez added that half of the roughly $105 billion in affected CLOs will no longer be at issue by 2017, and that the extra time should be sufficient to help institutions otherwise adequately prepare for the rule.
"It turns out that something on the order of 50% of the CLOs outstanding will mature or be paid before the end of 2017, so much of the CLOs will be done by that period of time," he said. "Having two extra years allows institutions more time to divest the CLOs as appropriate and to conform the CLOs to something that would be exempt from the Volcker rule there's a variety of ways they can do that."
Lawmakers on both sides of the aisle also pressed regulators, particularly Richard Osterman, acting general counsel at the Federal Deposit Insurance Corp., about agency involvement in Operation Choke Point, a Justice Department investigation into online payday lenders.
The FDIC and other regulators have reportedly been stepping up scrutiny of banks' relationships with the third-party online lenders. Critics, including some lawmakers, have repeatedly warned that DOJ efforts to push fraudulent companies out of the market is hurting law-abiding short-term lenders as well.
"Operation Choke Point is a perfect example of regulatory [oversight] gone amok," said Rep. Blaine Leutkemeyer, R-Mo. "Not only do we have a shadow banking system, but it seems we have a shadow regulatory system as well."
The calls come as industry groups, including the Independent Community Bankers of America, weigh in too.
Camden Fine, the association's president and chief executive, asked the Justice Department in a letter Tuesday to shut down its operation and "focus its resources directly on businesses that may be violating the law, rather than targeting banks providing payment services."
Osterman and the other regulators largely declined to discuss details related to the Justice Department's probe, noting that they are not directly involved.
"Our efforts are focused on making institutions aware of the risks that can be involved. As long as institutions are managing those relationships and the risks, they're neither prohibited nor discouraged from providing those services," Osterman repeatedly told lawmakers.